Sep 23, 2006 05:25 PM IST |

Growth or Dividend - How to make the right choice?

Growth, dividend payout or dividend reinvestment? Choosing the correct option is as important as choosing the right fund. Sandeep Shanbhag lists out the various factors to be considered before you take your pick.

Growth or Dividend - How to make the right choice?

Other Reasons for choosing Dividend
Of course there are a couple of excellent reasons given to me by investors for choosing the dividend option. One is of course, needing the funds for day to day life. The second one was that getting dividend in a rising market is like partial profit booking, which is good form. The funds representing dividend can be invested into fixed income avenues or even fixed maturity plans thereby rebalancing the asset allocation.

Excellent arguments that cannot be argued with, per se. Only one hitch. Unlike fixed income avenues (such as PPF, RBI Bonds etc.) when the interest is fixed, not only in terms of the amount but also the timing thereof, dividends from mutual funds are at the discretion of the mutual funds. One never knows how much would one receive and when. In other words, the fund manager may decide not to distribute dividend. Or he may decide to distribute much less than what you need. Or much more than what your intended shift of the asset allocation dictates. What do you do?

There is a simple solution. Ask for the dividend yourself.

Yes, you read that right. You can ask for the dividend. To put it differently ---

'When the MF pays you money, it is called dividend. When you yourself withdraw an equivalent amount, it is called capital gain!

We all know that after one year, withdrawals (capital gains) from a mutual fund are tax-free. Therefore, for your annual dividend requirement, do not depend upon the whims of the mutual fund concerned, instead withdraw the funds as per your requirement.

This way, you can earn dividend not at the whim of the Mutual Fund, but at your fancy! The value of your investment remains the same, whether dividend is paid to you by the MF or whether you redeem units of an equivalent amount.

To Sum Up
The psychology of investing, fiscal policy and your requirements from your investments, all go hand in hand in deciding the optimal option to choose from. As fiscal policy stands today, the dividend option doesn't stack up against the alternatives. However, if tomorrow, long-term capital gains tax is imposed, this strategy wouldn't work and the dividend option would once again come to the fore.

To check out the pros and cons of the Dividend Reinvestment option vis a vis Growth, read - Dividend Reinvestment v/s Growth

Follow us on
Available On