Switch from Div Reinvest to Growth option of MF

POSTED BY Anand ON December 8, 2010 12:13 pm COMMENTS (8)

Hi,

I have invested in some MFs in Dividend reinvestment option. Its current value is around 2 lakhs.
Since post-DTC, dividend is going to taxed at 5%, I want to switch to Growth option.

What are my options?

Since NAV of growth and dividend options are different, it’s like redemption of dividend option
and purchase in growth option.

Is it advisable to invest a lumpsum (which I will get after redemption) in today’s markets?

But I was thinking whether today’s situation (some amount invested in equity) will be the same as tomorrow’s situation (redemption proceeds invested as lumpsum in growth options) ???

In both cases, the amount is exposed to equity risks. In fact, if I redeem, will it be like profit booking?

Please advise.

Thanks
Anand

8 replies on this article “Switch from Div Reinvest to Growth option of MF”

  1. Sohil says:

    okk now say 10k invested 6 years back.

    28k right now worth(divid reinvest) .

    Switch made to growth.So 70 buks is the charges right

    Now suppose if dividend declared at 20%.Which is paid on face value of say 10.Which means 2 rs per unit .holding 1500 units now.SO dividend is 3000 rs.And suppose we are dtc regime than 5% ddt will mean 150 buks tax paid on behalf.

    Wont this mean it still favors growth over divid reinvest.

  2. Sohil says:

    Sorry but can you put more detail on what is seamless transfer .

    Also 0.25% penalty you mean to say on redemption or on switch?
    As we get answer we will try to solve this querry with some dummy example.

    1. Ramesh says:

      Eg. if you want to do a redemption from say HDFC equity fund which has a value of Rs. 10,000, then you will get Rs. 9,975 (25 will be deducted as STT- the penalty!).
      Same with switch. If you transfer from Rs. 10,000 worth units of hdfc equity – div reinv plan to growth plan, then you will finally get Rs. 9975 worth units of growth plan.
      Hope this makes everything clear.
      Ramesh

  3. Sohil says:

    Just found this text from sandeep shanbhag article.Though i have mailed him to rewrite article regarding same considering dtc into mind..

    Just have a look

    [quote]Lastly, a switch from dividend to growth or growth to dividend option (unlike Ulips) does attract capital gains tax liability. Therefore, if the switch that you are contemplating is within the options in an equity MF, take care to see that you have invested over one year ago. In that case, LTCG would be exempted; else the same would be taxable. However, a switch from dividend to dividend reinvestment option will not invite any tax liability. Since due to current tax laws, there is no difference between dividend reinvestment and growth, it is suggested that if the switch is being made before a holding period of one year, it should be done in the dividend reinvestment option. This would give similar benefit as the growth option but without the attendant tax liability.[/quote]

    http://www.dnaindia.com/money/column_made-capital-gain-loss-know-the-set-off-math_1448224

    1. Ramesh says:

      I do not think DTC will change anything related to this.
      A dividend reinvestment and a growth option of the same fund are considered different funds from a tax point of view and seamless transferring between the two is not possible currently.
      Switch from 1 to the other will be considered as a redemption from one plan and purchase in another plan.

      Also consider the 0.25% penalty for redemption in case of equity and equity hybrid funds!

  4. Anand says:

    Thanks for the replies.

    I am not trying to time the markets. I didn’t know that we can give instructions to MF house
    to switch from dividend to growth option and it is not necessary to take the delivery in your account.

    I will stop dividend SIPs and start respective Growth SIPs.

    For funds which have completed one year, I will do switch now itself.
    For funds less than 1 year, I will wait till they complete one year so that I can save
    short term capital gains.

    This forum is awesome!!

  5. Dominic Prakash says:

    All you have to do is

    1. Stop SIP if any
    2. Send a written request or fillup a transaction form to switch from Fund-A to Fund-B

    There is no need to redeem your fund if you are planning to switch.

  6. Ramesh Mangal says:

    DTC will be applicable from April 2012, 1.5 years away! So till then the DDT for equity and hybrid equity funds (equity portion more than 65%) will remain 0%.

    Switching from dividend to growth or vice versa is exactly like redemption (subject to exit loads, if any and STT @0.25%).

    In my opinion, it is pointless for a non-savvy investor to try and time the markets. If your funds have been doing well, just switch them to the respective growth options. Switching will enable you get the same day’s NAVs. It is very tempting to think that delaying for 1 or 2 days may get you 1-2% lower price. But remember, that 1-2% can be the higher price. Even if markets fall for 2-3 days, you will then be tempted to wait for more correction – there is no end to it, except heartburn!!

    Do you have another asset / option where you will be able to get a better future return. If you can identify, you should go ahead with that asset class. In my opinion, there is none so remain invested in equities. By SIP. By lumpsum, whatever. The long term potential of the indian equity market is much better than any other class available.

    Always remember that there is inflation risk, opportunity (lost) risk and cost paid to product providers. These should also be included in the total risk analysis.

    Ramesh

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