I have been investing in equity-based mutual funds in dividend payout option. The money so received is invested in mutual funds either in lumpsum or through the SIP route. Some expert has advised me not to invest in dividend payout but to invest in growth option only. What are the advantages and disadvantages in both the options
Since you have been receiving dividends for some time, you would have noticed that after a dividend payout is implemented, the NAV of the fund goes down. In case of a growth option your gains remain unrealised and can be imputed on the basis of the change in the NAV. The main difference between the two options lies in the reinvestment of gains received as well as the tax treatment. There is no difference in the returns made by the fund in case of the two options. There is one school of thought which believes that given the uncertainty and risk in equity markets, profit booking in the form of dividends is a good strategy, rather than relying on the judgment of timing the market to enhance returns.
In your case, since the dividends received are being reinvested, you end up incurring further entry loads that can be avoided by remaining invested in the fund under the growth option. Also, the time it takes to receive dividends and redeploy them, can be better spent by keeping the funds invested. Added to this is the dilemma for finding good opportunities to invest in.
The tax implication that could potentially alter your returns under the two options is applicable more for debt funds and less for equity funds. This is due to the imposition of dividend distribution tax of 12.5 per cent (plus surcharge) for debt funds. Such a distribution tax implicitly eats into the corpus that could be potentially in your hands. Equity and balanced funds are exempt from paying such a distribution tax. Further, in case of debt funds, a short-term capital gains tax depending on your income bracket is also levied for units redeemed within a year of investment and in case of equity funds a tax of 10 per cent is applicable in the short term. A long-term capital gains tax of 10 per cent (plus surcharge) is applicable only for debt funds and not for equity funds.