At a first glance, both of them seem to be doing the same thing. Alas it was that simple!
Mutual Fund world already offers so many options to investors, adding another dimension takes the complexity to the next level. As an investor you can choose one of three options – Growth, Dividend Payout, Divident Reinvestment.
For the sake of simplicity, we are not considering Divided Payout option in this article.
Coming back to the title, biggest difference between the two is the way taxes are levied on them. You pay taxes mainly through two ways – dividend distribution, capital gains. The table below throws some light on this:
MF Taxation – Individuals (2011 – 12)
| Dividend Distribution | Capital Gains – Short Term | Capital Gains – Long Term | |
| Equity | Nil | 15% | Nil |
| Debt – Funds other than Liquid | 12.5% | As per Income Tax slab | Lower of
– 10% without indexation – 20% with indexation |
| Debt – Liquid Funds | 25% | As per Income Tax slab | Lower of
– 10% without indexation – 20% with indexation |
– Education cess and other sucharges additional
– Short Term (less than one year), Long Term (more than one year)
As you can see if you had invested in a Debt scheme, you have to pay dividend distribution tax ie money which gets ploughed back is little lesser than if you had stayed invested. However, you have to pay higher capital gains tax on the NAV gains in case of growth option. So what do we make out:
Short term – Dividend Reinvestment
Long Term – Growth
Please note it will not work in all the situations (esp zero or low tax bracket), one should do calculations for individual case.
In case of Equity scheme, impact of DDT would not be there and only capital gains will come into picture.
Short Term – Dividend Rinvestment
Long Term – Growth
As a side note, we don’t encourage to invest in equity funds for short term.
For the long term, one would like to believe there is no difference between the two. However, please note that in Dividend Reinvestment you are buying new units every time and will have to be careful about short term capital gains tax when you are actually looking to come out of your investments. It is therefore advisable to go with Growth option.
The tax laws are constantly changing (for eg there was DDT on equity schemes in past) and DTC (Direct Tax Code) could come with substantial changes. It is important to be cognizant of that before making the decision.
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