Before investing in mutual funds, as an investor you are required to select whether you wish to opt for a growth or dividend option. In the case of a growth option, profits are added to the principal amount. Hence, no dividends are paid out to you and the only way you can receive profit payouts is by redeeming your investments. On the other hand, if you opt for dividend option, you are entitled to receive payouts in form of dividends. You can also reinvest the dividends you receive in the same scheme.
There are a number of strategic reasons for opting for the dividend option. For example, if your fund has invested in a high-risk or volatile sector, taking the dividend will allow you to book a profit before the fund value drops. However, due to the dividends being paid out to you, you could lose out on the opportunity of earning further returns through the power of compounding by leaving your money invested in the fund for a longer period of time. The dividend payment option also reduces the fund’s Net Asset Value (NAV).
If you choose to receive a dividend from an equity mutual fund, you are not liable to pay any tax on such dividends. If the fund happens to be a non-equity fund, however, it is required to pay a dividend distribution tax on dividends by the asset management company (AMC), before they can make any payouts to fund investors. You should note that dividends paid out to investors are the discretion of the fund manager depending upon the profits gained by the scheme. In case the scheme fails to generate profits, the dividends may not get paid for that particular period.
Furthermore, it is important that you continue to assess your objectives and requirements periodically, and stay aware of any changes in how your funds are managed.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
* Dividends are subject to availability of distributable surplus and approval of Trustees. It should be noted that pursuant to payment of dividend, the NAV of the plan/dividend option of the Scheme would fall to the extent of dividend payout and statutory levy, if any.
**Past performance of the Sponsor/ Mutual Fund/ Investment Manager are not indicative of the future performance of the Scheme(s).