Mutual Fund Schemes, Since April 1, the government has levied a 10% dividend- distribution tax on all dividends paid out by equity- oriented mutual funds. Given this, financial planner believe investors would do well to invest and opt for the growth option
1. why are advisors asking investors to go for growth option instead of dividend option ?
Advisors believe it will be tax efficient for investors to go for the growth plan of mutual funds in equity-oriented schemes. If they have existing investments in dividend plan they could move to the growth option and opt for a systematic withdrawal plan (SWP) if they need cash flows every month. While dividend payment is controlled by the fund house and the fund could skip it in a particular month if it does not have distributable surplus or pay a higher dividend which may be extra for the investors, SWP ensures a constant cash flow and can be controlled by the investor. He can specify the amount he wishes to withdraw every month and choose a date accordingly. Also the growth iption can be handy as long-term capital gains up to Rs 1lakh are tax free for investors.
2. How will the tax impact you ?
Till now dividend in and equity-oriented mutual fund scheme be it an ELSS fund, tax saving scheme, equity scheme, sector fund, balanced fund or equity savings fund, was tax free in the hands of the investor. After this year’s Budget, from April 1, fund houses will deduct a 10% dividend distribution tax and pay the investor. So if you were getting a dividend of Rs 1,000 per month from your mutual fund scheme, you may now get Rs 900 only.
3. What should investors consider if they have to switch their old investments from dividend to growth option ?
While switching from dividend option to the growth option of the same scheme investors need to keep a couple of things in mind. You need to see the exit load a fund house charges which varies from one fund house to another. While some fund houses charge an exit load if you switch, many do not charge for a switch in the same scheme. Also a switch is considered a sale transaction and if it is less than a year you will have to pay short-term capital gains tax for the same which is equal to 15%. Investors need to keep these things in mind before switching options.
Mutual Fund investment are subject to market risks, read all scheme related documents carefully.
Source : The Economic Times, Google.
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