Growth plans for mutual funds is a sought out option by most mutual fund investors. Growth plans are known to provide returns in the form of rising values of mutual fund units.
What Is a Growth Plan?
In a growth plan, the profits that are made are reinvested into the scheme as opposed to being given to the investors. This enables the investors to benefit from the powers of compounding. A growth plan is usually resorted to by those investors who do not require a regular income out of these mutual fund schemes.
The NAV of a growth plan is usually higher than dividend options as the profits are reinvested back resulting in the appreciation of the scheme.
Who should invest in Growth Funds?
Growth funds are funds meant for investors who have a high risk appetite and long term investment objective. But it ensures that the risks are suitably rewarded with high returns. Investors in such funds must hold their investment for a period of at least 5 to 10 years.
What are the benefits associated with Growth Funds?
The benefits of growth funds are that there is a potential for high returns, risk factors, stock volatility, tax efficiency, expert management and diversification.
What are the disadvantages of Growth Funds?
The disadvantages of growth funds are that there are high market risks, there is absence of dividends, and it requires a long term view.
What is the tax treatment for Growth Plans?
Taxation on mutual funds is dependent on the asset they invest in, ie., debt, equity or a combination of the two. Do note that term capital gains are taxed at 15% in short term equity funds. Also, long-term capital gains of up to Rs. 1,00,000 are not taxable. Anything higher than this has a 10% tax.
When it comes to debt funds, anything less than 3 years is considered short term and it is taxed at the tax slab that the investor falls in. Any long term capital gains are taxed at 20% with indexation benefit
What is the difference between Growth and Dividend Mutual Funds?
|Dividend plans||Growth plans|
|The profits made are distributed to investors.||The profits are reinvested into schemes.|
|Ex-dividend NAV is lesser.||The NAV is higher due to the power of compounding.|
|Lower total returns.||Higher total returns.|
|Individuals who require a regular cash flow must invest in this scheme.||Individuals who do not require cash flow on a regular basis, and want growth of the NAV instead should invest in this.|
What is the Difference Between Dividend Reinvestment Plan and Growth Plan?
|Dividend Reinvestment Plan||Growth Plan|
|There is an increase in the overall unit holding of the investor and a higher capital gain.||The value of the growth plan compounds over a period of time.|
|NAV reduces to the extent of the dividends though there is no direct payout.||The fund manager has the discretion to invest the funds in more securities.|
|The total value of the growth and reinvestment plan reduces to the extent of the dividend being swiped out.||NAV remains the same in case of growth fund. The total value of the growth and reinvestment plan is the same. This is a more preferred option in case of equity mutual funds and balanced mutual funds.|
A Comparative Analysis of three mutual fund plans through an illustration
|Parameters||Growth Plan||Dividend Plan||Dividend Reinvestment Plan|
|As on 1st January, 2020|
|NAV (in Rs.)||100||100||100|
|Total investment (in Rs.)||3,00,000||3,00,000||3,00,000|
|As on 31st December, 2020|
|NAV (in Rs.)||150||150||150|
|Total investment (in Rs.)||4,50,000||4,50,000||4,50,000|
|Dividend declared on the date||N.A.||Rs 1.5/unit||Rs 1.5/unit|
|Dividend paid to unitholders||N.A.||Rs 45000||N.A.|
|Dividend reinvestment amount||N.A.||N.A.||Rs. 4,500|
|Post dividend NAV (in Rs)||N.A. remains the same||135||135|
|Units issued for dividend reinvestment||N.A.||N.A.||333.33|
|No. of units post DRP||N.A.||N.A.||3333.33|
|Value of investment post dividend||Remains Rs 4,50,000||Rs 4,05,000||Rs 4,49,999.9|
Frequently Asked Questions
- In case you have retired and wish to have a regular income, then which option should you look out for?
You must look out for a dividend plan, if he or she wishes to have a regular income. It will also lower the risk encountered by the investor.
- Does Growth plan fit well with one’s long term financial goals?
As the profits are reinvested by the fund automatically,, the growth plan is considered to be appropriate for long term wealth creation. This is because compounding really works in favour of the investor.
- How must one switch from dividend to growth option?
An investor can switch from dividend option to a growth option through a sale of old units and purchase of new units. But there can be extra costs involved like exit load or capital gains taxes on the sale of old units.