Sunday, February 22, 2009

GROWTH or DIVIDEND ?? Which payment option is best??

Friends,one common question that most of the investors of ELSS /mutual funds etc have is regarding the mode of receiving the proceeds out of the investment instrument.Most of the ELSS/mutual funds have these options:

Here the fund house pays the investor part of the profits made periodically as dividend. This ensures that the investor gets regular access to liquidity and also is able to reap the benefits of the investment periodically and regularly.It appeals to lot of people who have need for regular liquidity.
Here the fund house retains the profits made in a year and reinvests it for generating more returns next year. This continues till the investor exits from the scheme. This is done take the benefit of compounding of interest in long run by investing the profits made . This is good for people who don't require regular liquidity and are looking at wealth creation over a period of time.
Tax Implications under both options:-
The dividend paid in the hands of the investor by the company is free of taxes , but the AMC needs to pay dividend distribution tax (DDT). Since the DDT is eventually paid out of the investible corpus , the investor ends up loosing under dividend option. While under growth option, any proceeds out of the fund are completely tax free and as such it is tax efficient option as well.
So now lets attempt to answer the question as to which one is best??
I have no doubt in my mind that one should opt for Growth option as it offers you the opportunity to take benefit of the miracle of compounding interest resulting in wealth creation and that is the ultimate g0al of any investor. As far as the need for liquidity is concerned, one can always sell part of the portfolio to meet the liquidity requirement as and when required. So in effect you don't forgo the liquidity option as well. While under Dividend option you will get the dividend irrespective of the fact whether you need money or not thereby loosing out on an opportunity to have that money work for you by being reinvested by the fund house. And if this is not enough, the clincher offcourse is the superior tax benefits that you get under growth option (though the benefit is indirect only).
So, go for Growth option for all your schemes.

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