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Do dividend plans make sense?

Dhirendra Kumar makes a case for the growth option over the dividend one

Three types of plans are available to a mutual fund investor - Dividend, Dividend Reinvestment and Growth plan. Which of them are the most beneficial?
- Ashok

Amongst the three options, only the growth plan makes sense, while the remaining two are quite disadvantageous to an investor. Although this was not the case earlier, the situation changed following the imposition of dividend distribution tax (DDT) on equity-oriented mutual funds. Even in the case of debt funds, invest in the growth option and consider withdrawing periodically a part of your investment to derive income. This can easily be done by setting up a systematic withdrawal plan (SWP).

An SWP works just like a dividend plan but it helps you decide in advance the amount and the periodicity to receive that amount. Therefore, by opting for the growth plan, one gets superior control of the income flow. Besides, an SWP comparatively turns out to be more tax-efficient. This is because when you start an SWP in a debt fund, you end up deriving income mostly from your corpus, as the gain portion in the first few years is very small. In later stages, say after three years, when you can derive more profits, a debt fund will also give you indexation benefit, thereby helping you reduce your tax rate. In the case of equity funds, by choosing the growth plan, you can completely do away with DDT.