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  • Category: Mutual Funds

    Final amount received in growth vs dividend reinvestment mutual fund


    Wondering which mutual fund will provide a better return among growth and dividend reinvestment mutual fund? Want to know which one is more profitable? Here, on this Ask expert page check out the detailed difference between both mutual funds in terms of the returns accrued.

    Suppose I invest the same amount of money in 2 mutual funds: one is growth fund and the other is dividend reinvestment.
    If we assume that the time period of investment and return percentage is same, will there be a difference in final amount received in growth vs dividend reinvestment fund?
  • Answers

    3 Answers found.
  • Selecting a plan between a fund with a growth option and a fund with a dividend reinvestment option is very confusing and there are many choices. Both the options are having their own advantages and disadvantages. It depends more on the individual needs and circumstances of the investor.
    Mutual Funds with a Growth Option:
    In the growth option, the investor will not receive any dividends that may be paid out by the stocks in the mutual fund. But by selecting a growth option, you are allowing the fund company to reinvest the money received as dividends. This money increases the net asset value (NAV) of the mutual fund. If you want to receive regular cash from the mutual fund, you should not go for it. But it will maximize the fund's NAV and receive a higher amount when you sell them off. In this case, the investor does not receive more shares, but his/her shares of the fund increase in value.
    Mutual Funds with a Dividend Reinvestment Option
    Dividends obtained will be used to purchase more shares in the fund. Cash is not paid out to the investor when dividends are paid on the stocks in the fund. Cash will be used to buy more fund units and add them to individual investors' accounts. In this system, the number of shares owned will increase over time. The account grows in value faster. There are many investment companies which will offer this service to shareholders without any extra cost. Investors realize a capital gain upon the sale of their units
    Selecting an Option
    It is up to shareholders whether they prefer to have dividends reinvested or paid out. But dividends in IRA accounts may be reinvested by shareholders who have not attained the age of retirement. If they do so they will not incur early withdrawal penalties from the Internal Revenue Service (IRS).
    Dividend Payouts
    In this case, the dividends are paid directly to the shareholder. Dividends are swept directly into a cash account, transferred electronically into a bank account or sent out by check. No fees for having their dividends paid in cash.
    As far as tax matter is concerned it will be the same in both the methods.
    The choice of a mutual fund will be different from one investor to another. There are so many options there with so many different ways. It is better to examine its specific attributes and confirm that the plan suits our requirement. I suggest you contact a good financial advisor and explain to him your requirement so that he will guide you accordingly.

    drrao
    always confident

  • In the growth option, the dividend is not paid to the investor but is ploughed back in his investment and his units held are increased to that extent. This eventually creates an increased number of units and at the time of selling it is beneficial to the investor.

    On the other hand in dividend reinvestment option the dividend is to be shown by the investor in his taxable income for that year. Though he is reinvesting it but it is considered as an accrued income during the year and hence is taxable.

    It is difficult to say exactly in which option the final growth will be more as different tax treatments are done for different options. Generally people prefer growth option.

    Thoughts exchanged is knowledge gained.

  • Growth option and dividend reinvestment option are more and less alike but there are subtle differences in them which are to be understood before arriving at the comparison of ultimate gain in these schemes respectively.

    Growth options are generally meant for long time investors who are not interested in receiving an annual dividend payout for their expenses or other purposes. In the growth option the automatically reinvested dividend will not be taxable but the capital gain tax is levied when the investment is redeemed or sold. It could be the short term capital gain or long term capital gain. Depending upon the type of fund the period of these short and long modes is determined. In equity oriented funds ( the funds which invest at least 65% in equities) the short term gain is considered up to 1 year or less while in non equity funds (debt, bonds etc) it is taken as 3 years or less. So, for equity mutual funds gains realised after 1 year will be treated as long term while for non equity funds gains realised after 3 years will be treated as long term. Now I come to the rate of taxation on these growth schemes. On equity mutual funds for short term gain the tax will be 15% while there is no tax on long term gain. This is an attractive point for the investors and that is one reason why so many people are going for growth schemes for longer period. On non equity funds the short term gain will be added to the income of the investor and tax will be levies as per his tax bracket while long term capital gain tax will be levied 20% after indexation.

    In the dividend reinvestment option the dividend in the hands of the investor is not taxable on yearly basis but there is a small difference between equity and non equity schemes. In equity scheme it is all right but in the non equity scheme the fund house has to pay a dividend distribution tax to the Govt and to that effect the NAV of the MF units will be decreased.

    So the net gain from growth option/ dividend reinvestment option is to be understood in the above terms and depending upon ones tax liabilities the appropriate scheme is to be opted.

    Knowledge is power.


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