Choosing an investment fund Option / Types of funds / Funds offer benefits in the form of dividends

September 22nd, 2010| Finance.

Choosing an investment fund Option / Types of funds / Funds offer benefits in the form of dividends

Investment fund

To own the profit of stock market, it is better to invest in shares or to buy mutual fund units. Choose between dividend or growth options.

Selection of mutual fund is a challenge.  Give preference to equity, debt and balanced fund depending on the matters like our requirements and capacity to withstand ups and downs.  Before choosing an option, take some points in to consideration.  The points to be considered depend on the type of investment of the fund.

Dividend option: Dividend option offers the profits earned in the shares investment fund from time to time.  Dividend is declared on the face value of the share but not on Net Asset Value.  After dividend is declared Net Asset Value of the scheme decreases.

Dividend Reinvestment: Dividend is declared in this.  But is not paid to the Unit holders.  Additional units are allotted equal to the value dividend.  The NAV decreases in this option also correspondent to NAV.  The number of units in the account is increased.


  • Profits can be received from time to time.  There is no tax on the dividend.  There would be no need to sell the units for small needs.
  • Equity market allows receiving profits with out greed.
  • The profits in the form of dividends are received from time to time so the effect of ups and downs of market is not felt.
  • If the dividend is deposited in the bank account there would be not much use.  They may pay an interest of 31/2%. The amount should be invested in another fund.

Growth option: Reinvesting the profit earned in the form of dividends is growth option.  There would be no dividend in this.  NAV is more in Growth option when compared to Dividend option.  For example, if the NAV of a Growth option fund is Rs.56.09.  NAV of the Dividend option is Rs.23.22 only.  The difference between the two is the dividend.

  • Continuing investments for long terms is better in shares or equity funds.  Growth option gives the opportunity to continue the investments.
  • But the effect of ups and downs of the market is more.  It is impossible to sell them to get profits every time.
  • If mutual funds offer a share in the profit, that is called dividend.  If profits are received by selling the units, that is profit of the principal.

Debt funds

Investing in bonds which give fixed income are debt funds.  The rules on income of dividend funds are complicated in terms of taxes.  According to present rules, debt funds that pay dividends have to pay a tax of 12.50%.  Surcharge on this tax is additional.  This is not paid the investor directly.  But the burden is on him indirectly.  Because, the funds pay the profits after deducting the taxes.

Choosing options

  • Select Dividend or Dividend Reinvestment option if the equity fund units are sold within one year.
  • Selecting a debt fund is difficult.  Select Growth option if the income of the investor is with in the limits of income tax exemption slab.
  • Growth option is better even when the investor is in the 10% slab.
  • If the investor comes under the slab of 20 or 30% slab, tax burden can be avoided by selecting Dividend or Reinvestment dividend option.  But one should not sell the units before one year.
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