Should You Opt For Dividend Option in Mutual Funds

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Your financial goals will determine which option you choose to invest in. For investors who are looking for long-term growth, the dividend option is best suited while those seeking regular income can choose to invest in the growth option.

Mutual funds offer investors a lot of flexibility in terms of features such as regular and plans . Direct plans allow investors to directly invest in mutual funds and to save on commissions paid to distributors by mutual fund houses. They also have a lower expense ratio. Regular plans are for investors who don’t have the time or knowledge to manage their mutual fund investments. Investors have the option to choose between a growth or dividend option within the plans. If wealth creation is part of your financial goals, you should choose growth option. Those who are looking for regular income should consider investing in the Dividend option of mutual funds.

Mutual funds invest in a variety of securities, including stocks, bonds and international securities. The mutual fund’s portfolio is made up of securities that are used to invest the pooled funds of its investors. To ensure that the mutual fund’s performance is consistent, it will buy and sell securities from its portfolio. The mutual funds scheme can make a profit during this process. However, as per SEBI mandate, funds cannot declare dividends from gains from the sale or current income from securities it holds. Mutual fund dividends are paid from the distributable surplus, or profit, made by the sale of securities in the scheme’s portfolio. As part of their portfolio, mutual fund schemes may also have dividend-paying stocks or interest bearing fixed income securities. These underlying securities must pay interest or dividends to the scheme.

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Investors seeking wealth creation do not require interim payments from the fund in form of dividends. Therefore, it is recommended that such investors invest in a growth option. This will allow them to experience a higher NAV and add the distributable surplus to the assets of their fund. These investors can benefit from the compounding effect of the fund’s distributable surplus remaining in the fund to make further investments.

Investors looking for regular income will benefit from investing in the dividend option. He can expect to receive some dividend income on an ongoing basis. However, such investors should be aware that the fund could not distribute dividends if the market falls or the scheme suffers losses in a bear phase. Investors in this category should have additional savings and investments to back them up.

Dividends are not taxable in the hands investors but the fund must pay a Dividend distribution tax on any dividends being distributed. This reduces the net distributeable surplus of the fund, while regular option investors continue to benefit from the compounding effect that the surplus contributes to a higher scheme NAV.

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