Which option is better under mutual fund investment whether Growth option or Dividend option after Union Budget 2020?

This question is very common among the investors since the burden of companies to pay Dividend Distribution Tax (DDT) has been removed and shall be shifted to the investors at their income-tax slab rates. Now, this would be a complication for the investors as they will have to decide between many options the most suitable option for them. Generally, under mutual funds, there is Growth Option and Dividend Reinvestment Option.

Under Growth Option, the investors are paid at the end of their investment tenure the amount as increased due to the market growth. It shall be increased NAV (Net Asset Value) as per market prevailing rates at the time of maturity. 

Under the Reinvestment option, the dividend that is declared by the company shall not be paid to the investor, instead, it is reinvested to purchase some more units of the mutual fund at the rates that would be prevailing on the date of dividend distribution. This option gives investors the benefit of compounding.

Now considering these factors and characteristics of both the options, the ones falling under the higher tax slabs won’t be benefitted from it and hence growth option shall be more profitable for them as the rates charged under the growth model are much lower and the same irrespective of income group.

For others, choosing from either option depends upon their income slab and hence is favorable as it gives the freedom to choose from the available options and taxpayers would end up paying lesser tax in the form of DDT.

You should also know that dividends shall be taxed even if they are re-invested in your portfolio and not received by you. So, in general, if there’s no difference between the tax you pay, you can opt for either of the two options but if there are chances that you will end up paying more under the dividend option, especially for higher-income groups, the growth option is the clear winner. However, with benefits come drawbacks, such as, if you invest in growth option you will not receive any dividend which means no return on dividend hence you will compromise with the power of compounding.

So, before investing, you should keep all parameters in mind and then consider your relevant option, which would save tax for you as well as help you to capture better returns, if not better, similar returns.