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POSTED BY ON April 15, 2012 4:41 pm COMMENTS (4)
I am a very long term investor and understand the difference between the Growth option and the Dividend Re-Invest option,but I am not able to calculate the which option from the above two would be better returns generating option among the two.I am seeing this only from the point of view of returns.
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Hi,
On a second thought, for NRIs it makes a big difference between Growth & Div-Reinvestment Options. Growth Option would not attract tax in their respective country till the fund is not sold. Dividend Reinvestment would however attract tax in their respective country as ‘Dividend Income’, which though taxable in India, is not always taxfree in countries such as UK, USA.
Regards
BFA
Hi Mohnish,
All above is very true, just a couple of more additions :
1. Small correction / clarification on what Ashal mentioned for debt fund, Dividends of debt funds are not subject to tax – they are tax free. However, before paying dividends, the Mutual Fund house would deduct upfront tax (Corporate Dividend Tax) and hence the returns would be lower than growth funds (for Debt Schemes).
2. If you are a very long term investor, better to go for Growth Funds, as it reduces the administrative complexity to identify your cost of acquisition of the units. After 10 years, you may end up doubting your exact sum invested. And with several dividend re-investments, it may make your admin matters a bit confusing.
3. Revisit your strategy every year after the Income Tax act bill for that year is passed. I can’t give an exact example on the top of my mind, but if the long term capital gain is no longer tax free, then you may have to think if Dividend Reinvestment is a better option or not !
Regards
BFA
Dear Mohnish, please read my reply in addition to what dear Justgrowmymoney has already told you. The impact on your return ‘ll be different based upon the funds you are investing in.
If it’s a pure Eq. fund, the answer given above is 100% true. But if it’s a Debt fund, the dividends are subject to Tax & thus reinvest of dividend option ‘ll fetch you lower returns than Growth option.
Thanks
Ashal
In a Growth Scheme versus Dividend reinvest – assuming there are no transaction charges and as per the existing tax laws – there is zero difference in terms of the final corpus generated.
In dividend reinvest the most recently bought units may be subject to short term tax if you were to sell the entire holdings at some point barring which there is no difference. At some point in time if you wish to receive dividends it will be possible to change the dividend option (payout and reinvest) which is an advantage. And that’s really to it!