Should I opt for a mutual fund’s growth plan or dividend reinvestment plan?
-Ashok
Ordinarily, a mutual fund offers three options: Growth option that keeps your earnings invested, Dividend option that gives you a dividend periodically, and Dividend Reinvestment plan that allots your units of the fund instead of paying out a dividend to you.
The difference between a growth plan and a dividend reinvestment plan is that your NAV will grow in the former while your units will increase in the latter. However, the value of your investment will remain the same in both plans. Our advice is that, keeping in mind the Direct Tax Code (DTC), you shouldn’t invest in a dividend plan. Under the DTC, the dividends that you will receive from an equity mutual fund will be subject to 5 per cent dividend distribution tax. Hence, you should invest in a growth plan of an equity fund.
This article was originally published on January 30, 2012.
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