Mutual fund dividend payout option: A gimmick?

POSTED BY Sambaran Mitra ON July 12, 2012 12:16 pm COMMENTS (9)

Why do mutual-funds have dividend-payout-option? Why not just have the growth-option?

I have heard the argument about getting to see the ‘colour of money’ on a periodic basis in dividend-payout-option. However, if that is the intention, one can get it as well by selling a certain number of units from growth-plan.

While selling X-units from a growth-plan, the investor is in complete control about how much money (s)he wants to realize. In a dividend-payout-option, the investor is at complete mercy of the AMC regarding the quantum of dividend-declared.

I do want to know the rationale of investing in dividend-payout-option of mutual-funds.

9 replies on this article “Mutual fund dividend payout option: A gimmick?”

  1. BanyanFA says:

    Sambaran,

    I would partly agree with you, however selecting the right payout option mostly hits from a tax perspective. Matters become a bit more complicated if investor is NRI. I wrote an article to detail this in a comprehensive manner. Check out http://insight.banyanfa.com/payout-options-in-mutual-funds/

    Please feel free to get back if you need more clarifications.

    Regards
    BanyanFA

  2. Sambaran

    Note the structure of the mutual funds , it invests in stocks and they also give back the dividends, hence mutual funds might want to pass on those dividents in same manner . Also at some level its trying to create a little bit of complexity , so that people get confused and things can be made to look exciting ! 🙂

    Manish

  3. When one has a long income earning period dividend usually makes less sense. Even amongst them there are classes of investors who would appreciate some cashflow every now and then. Dividend comes in handy – tax free, no STT to be paid, need not mention every redemption in IT Return etc. and also helps for intermediate onetime expenses that come up for people.

    Agreed wealth will grow only when left undisturbed but dividend does have its own advantages. In times when markets are dragging at same levels for few years – for brief periods of time like 3-4 years indeed dividend funds can outperform the same counterpart Growth scheme and if someone’s minor goals are achieved in that duration indeed it is a smart decision.

    The way MFs advertise saying a dividend is impending/declared and encouraging people to buy the scheme as if it is free money – that is incorrect and a real gimmick and not the dividend plan itself!

    1. Thanks a bunch @justgrowmymoney for such a detailed answer. However I do not understand the following:

      You said:
      “Even amongst them there are classes of investors who would appreciate some cashflow every now and then. ”
      sure, people may need cashflow. Just sell the requisite number of growth-units in that case. This is far better than dividend-payout where you are at the mercy of AMC regarding the amount and periodicity.

      You said:
      ” tax free, no STT to be paid”
      Even growth-option will be tax-free if you can wait out 1 year. Regarding STT I agree but not sure how big it turns out to be.

      You said:
      ” need not mention every redemption in IT Return etc. ”
      This is not true. Even if dividend is tax free, you should declare the dividend in returns.

      So I am still to find out what a dividend-payout plan can achieve, that growth-plan cannot.

      1. Dear Sambaran, One size does not fit all. That’s why 2 different kind schemes are there for the people to chose as per individual need.

        Thanks

        Ashal

      2. Growth option is indeed tax free after 1 year but dividends may come even earlier.

        In a SIP scenarion when you redeem units you have to manually know how many units have completed 1 year if you want to avoid exit loads and taxes. Also WHEN TO SELL is a major headache for everyone. Should I wait a few days/weeks/months. And the fact is no one knows when the markets will peak. Dividend is automatic and for most stable schemes the dividend timing is mostly fixed – few days here and there perhaps. Agreed the dividend amount is not assured each year but good performers usually also have decent dividend distributions.

        I was not too clear on the dividend part. Indeed you have to declare all dividends but you can just write them as
        MF Dividend 1200
        MF dividend 700 etc. and barely takes time when filing tax.

        If you want to sell units that also multiple times a year across schemes you hold and you have a monthly SIP for example you have to enter the buy and sell costs with the transaction dates the STT paid etc.. Imagine even a dozen entries and this alone is a deterrent for many of them. Just try doing that this tax season and you can imagine what the pain is. The pain multiplies when the units redeemed are bought on different dates at different costs. Book keeping becomes a major pain.

        STT is a minor amount for most redemptions but why spend money when dividends can get you a comparable amount for free.

        Apart from dividends if you still need money you can always sell more units.

        And…. this is debatable – the thought of a dividend payment is very satiating to many people. It gives them a ‘feeling’ they are making money. Call it a dope.

  4. Ramesh says:

    It is good in case of ELSS.

    1. Can you explain why dividend-option is good in case of ELSS?

      1. Ramesh says:

        You get an 80C invested money at the earliest.

        No other option gives you that.

        Eg, say you are investing in an ELSS in Feb, and which declares the dividend in Mar. You can invest and partly get back the money in 1 month’s time only.

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