Dividend plan and growth plan is one big decision to take while investing in Mutual fund. People tend to take a long time to decide which plan to go. While dividend plan would find an easy option amongst most investors but one has to check if that suits them or a herd mentality. Let’s look at the choice to throw some light
Dividend Plan: Easy choice to pick from the 2 plans. The general impression is that it is tax-free and hence an easy pick. Dividends are a classic case of withdrawing your income or profits continuously to meet cash flow requirement. This would happen in cases of a senior citizen who have a retirement corpus and need funds for living and hence an ideal fit. Similarly, some good financial planning would have lead to investment that gives steady cash flows to match EMI. In such cases, the dividend plan is a perfect fit.
Growth Plan: This plan ensures you accumulate your interest or earnings into the scheme to build wealth. The cash flow need in such case do not arise and hence makes sense to grow your asset. The power of compounding that we talk about works only in this option. There is taxation that affects the withdrawal of funds but the incidence of tax is the same be it in dividend or capital gains. The funds pay a dividend distribution tax that is deducted from the funds which mean the unitholder is paying for it. So under the circumstances, the capital gain is a better option
Choose wisely. Most investors who come to the mutual fund have come with the objective for long-term wealth creation and such investors don’t need a dividend plan. So every time you take the dividend and later decide to invest it becomes a fresh investment and can attract capital gains if redeemed within 1 year. Also, you don’t need to wait for the fund to declare a dividend and receive it. By using a systematic withdrawal plan you can write your own cheque and take your money when you need it.
Comparative Summary
| Dividend Plan | Growth Plan |
|---|---|
| De-risk by withdrawal | Gains don’t get encashed |
| Works against long-term | compounding effect |
| Dividends are tax-free | STCG - 15% ; LTCG - 10% |
| NAV suffers DDT * | Not applicable |
| No set-off benefit | Capital gains can be set-off |
| Not applicable | LTCG of 1 lac exempted |
Notes: DDT- Dividend Distribution Tax; LTCG – Long-term capital gains tax; STCG – Short-term Capital gains tax
Conclusion: As the name signifies, dividend plan divides your income and growth plan grows your money. Exercise your choice diligently