I wish to invest about Rs 1 lakh in equity funds to meet the expenses of my grandchildren's higher education. Which of the plans - growth or dividend- is superior and safe? -Arun P Talpade
20-Mar-2007 •Research Desk
I wish to invest about Rs 1 lakh in two or more equity mutual funds to meet the expenses of my grandchildren's higher education. I wish to know which of the plans - growth, dividend payout or re-investment - is superior and safe. Secondly, would an SIP be a good way or should I put lumpsum amounts?
-Arun P Talpade
Superiority and safety of returns is not affected by the different plans (growth, dividend payout and reinvest) that one invests in. Parameters such as better and safer returns are primarily affected by the investment strategy and the asset allocation of the fund, amongst other determinants. In choosing among a dividend payout, reinvestment or growth plan, one needs to assess the objective of investing.
The returns amongst the three plans are identical barring tax implications. Hence while a growth plan would be appropriate for some one looking at capital appreciation, the dividend payout would be better suited for someone looking at additional income. In your case since capital appreciation is your main objective with the funds invested over a longer term, you should opt for growth option.
We would suggest that you stagger your investments into equity funds rather than deploy the funds in one go.
This would reduce the risk associated with timing the market. If you have a lump sum amount available then you could look at the systematic transfer plan, wherein your funds will be parked in a short-term debt fund, with instructions to transfer a predetermined sum at periodic intervals to an equity or balanced fund. We would also recommend that as you approach your goal, you should begin moving your money in to debt-oriented funds. Here again a systematic withdrawal plan will be the best option.