If I invest for a period of 5 to 10 years in an open-ended equity fund, which option between dividend and growth would be better and why? Does it have any impact on the maturity value?
P. K. Sahay
The choice of growth or dividend does not make a dime’s worth of difference from the pure investment yield point of view. However, there may be different tax implications on the way you choose to receive your gains. Where investment in an equity fund is concerned, the effect of taxation will come into play only if the holding period is short-term i.e. less than 12 months.
In equity funds, dividends distributed do not attract a dividend distribution tax and are also tax-free in the hands of the investor. But short-term capital gains from equity are taxable at the rate of 17 per cent (including surcharge and cess). So the dividend option would be better as you can get a part of your gains tax-free in the form of dividends, which in turn reduces your total tax liability.
But in case of a long-term investment in an equity fund like in your case, the net returns from either of the options would be identical. For the purpose of long-term wealth creation, growth option is better than dividend payout as your gains remain invested. Conversely, if you want regular cash flows, then you can choose the dividend payout option.