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Dividend funds vs. Growth funds in India Overall RATE RATE (0.00)

You can invest in mutual funds in India in two schemes – Dividend and Growth funds. The main feature of Dividend mutual funds is that they pay out money to the investors. However, Growth mutual funds do not pay out any money to the investors, which makes them different from Dividend funds. Mutual funds earn money in diverse ways. They might invest in the equity market where they get dividend from companies. Moreover, they might invest in debt where they would receive interest. Further, they might buy and sell for profits and while keeping the excess money. The bottom line is that this money earned by mutual funds could be paid out as a dividend.

Mutual funds by themselves are not taxed as an entity. Therefore, if a mutual fund earns profit, it would retain the profit within the fund and the fund is not taxed at all unlike in the US. Dividends as part of the tax law are not taxed in your hands as the investor. Therefore, to make extra revenue the government charges dividend distribution tax (DDT) on the mutual funds. DDT is different for various types of funds. For equity funds with greater than 65% equity, there is no DDT. However, there will be a very small STT of 0.25% when you sell your units in an equity fund. DDT for liquid funds is 25% while all other funds have 15% DDT. Liquid funds invest in short-term money markets or overnight markets and are supposed to compete with bank FDs and savings accounts. Thus, to bridge the difference they charge a higher DDT.

It is very important to know what happens to the NAV when dividend is paid out by mutual funds. When the funds pays out dividend, the NAV falls by the dividend amount and the DDT. For instance, let’s take the example of a Dividend and Growth fund with NAV of Rs. 20. Let’s assume that a dividend fund declares Rs. 2 dividend. Thus, the fund pays out Rs. 2, which amounts to DDT of Rs. 0.30 at 15%. There is no payout for the Growth fund. In this example, the NAV of the Dividend funds would reduce to Rs. 17.70, reducing by Rs. 2.30 (Dividend + DDT). However, NAV of the Growth fund stays at Rs. 20. Therefore, there is a vast difference between the NAV of a Dividend and Growth fund.

Did you ever ask yourself why you would choose a Dividend fund option? Some investors like being paid regularly, Dividend funds help you in this regard. Thus, they go in for options such as monthly, daily dividends, or weekly dividends. Sometimes, dividends are not paid at specified time intervals and are paid as per the plan when the fund manager decides to pay. There’s a perception that monthly dividend can provide you cash or high liquidity. However, investors must note that the mutual fund cannot guarantee these dividends in terms of frequency or value. In simple words, if the fund does not have the money at the end of the day, week, or month, it won’t pay you. Suppose the markets rise, the mutual fund manager declares a dividend. It’s a way to get your money out of the markets as the market rises. Therefore, profits are getting booked when the markets rise and your money is coming back to you. When the markets are down, the fund manager will not declare dividends anyway. Therefore, investing in Dividend funds is a way to book profits.

Now that we know why you would choose a Dividend mutual fund, let’s try to understand why you would choose a Growth mutual fund. Let’s say your tax rate for debt mutual fund is less than 15%. This would apply even more to a senior citizen who would need about Rs. 3-4 lakhs of income and his real tax rate may hover even in the 10% region on the income that he earns. If he invests in dividend funds, he would have to pay 15% DDT. Therefore, if you are an investor who is interested more in safety, Growth mutual funds in India will be a better investment option. Growth funds are beneficial for long-term capital gains. For instance, if you hold investment in Growth funds for more than a year, especially if it is a debt fund, your first 6-8% income is absolutely free because of the indexation benefit. The best part is debt mutual funds, which are Growth funds, generally tend to give you around 10-11% returns. If your first 6-8% of those returns is free, your taxable income will be much lesser since you are using a Growth mutual fund. In Dividend funds, you will pay 15% DDT for sure. One of the best aspects of Growth funds is that they will always benefit those who want to stay invested from a long-term perspective. If you are an investor who does not want to constantly book profits or exit the markets and in fact, want to stay invested, Growth funds are the best way. They will not only help you with the power of compounding, they provide you with the opportunity to plan your own exit. Therefore, in a Growth fund, you will not be depending on the fund manager to provide you with the exit or the dividend, which may not be the best strategy. You can plan your investments better with a Growth mutual fund.

At ACMIIL, we choose the best mutual fund basket for you based on your risk profile and financial objective. Following is the list of top Growth funds in India for investment:

Fund Name Rating AAUM (Rs Cr) NAV













    31-Mar-17 Rs 1 Year 3 Years 5 Years 10 Years CYTD FYTD Since Inception




Return % Rank Return % Rank Return % Rank Return % Rank Return % Rank Return % Rank Return % Rank
Birla Sun Life Frontline Equity Fund ««««« 15279.11 197.51 24.30 10 15.37 3 20.55 2 13.73 1 15.80 13 2.28 19 22.45 2
SBI Bluechip Fund ««««« 11396.46 34.37 20.06 22 18.69 1 21.42 1 11.18 8 15.27 18 2.38 18 11.58 16
Franklin India Bluechip Fund ««« 8076.89 420.65 20.35 20 14.20 9 16.46 11 11.96 3 14.60 22 2.91 15 21.69 4

 

 

To know more about investing in diverse funds in India and for assistance in financial planning and investment, give a missed at +91 8010968308 or write to us at investmentz@acm.co.in

*Mutual Fund investments are subject to market risks. Please read the Statement of Additional Information / Scheme Information Document carefully before investing.

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Why you know your risk appetite before investment? Overall RATE RATE (3.00)

Best investors spread their money into different baskets rather than investing all their money into one basket. Remember what our elders told us “don’t keep all your eggs in one basket”. That said, you need to remember that you are investing your hard-earned money in different asset classes. Thus, it becomes pivotal for you to identify your ideal risk profile to mitigate markets risks while deriving the most out of your portfolio. This becomes crucial because every individual possesses a different risk appetite.

 

The risk appetite that an investor possesses often decides the portfolio composition, asset weightage, investment efficiency, and potency of returns. An investor’s risk profile builds the all-important awareness of the overall risk appetite with regards to key capital investment decisions while determining the investor’s natural risk taking propensity based on current financial position. As an investor, it is very crucial for you to note that the returns on your investment are directly proportional to the risk you are willing to take to achieve those returns. Thus, higher returns would involve higher risks and vice versa.

The two major factors that become vital here are your desire levels in terms of returns and your capacity to take risks to get those returns from your investments. This build relevance for Risk Profiling, which tells you whether you are a very aggressive, aggressive, moderate, or conservative investor. Very Aggressive profile suggests that as an investor, you are more willing to take higher risks to derive higher returns. Aggressive profile indicates that you are willing to take higher risks to derive higher returns, but within an acceptable limit. Moderate profile indicates that you are only willing to take moderate risk and are happy getting medium returns from your portfolio. Conservative profile suggests that as an investor, you do not want to take any kind of high or moderate risk and are very happy with lower but steady returns.

 

How does risk profiling help in terms of planning your portfolio?

  • Very Aggressive profile – Equity heavy portfolio (around 75%) with least debt exposure

  • Aggressive profile – Higher Equity exposure (around 65%) with normal debt exposure

  • Moderate profile – Equally balanced debt-equity portfolio (around 50% each)

  • Conservative profile – Least equity exposure (around 30%) with highest Debt exposure

 

Once you know your profile, you will in the best position to work out an ideal asset allocation strategy based on your risk profile across different asset classes such as Equity, Debt, Gold, and Cash. You can start aligning your portfolio allocation based on your risk profile. For instance, if you are an aggressive investor, you can go equity-heavy by investing a major chunk of your savings in equity instruments such as stocks, IPO, MF SIPs, NFOs, OFS, and Corporate FDs. You can park rest of your allocated savings in debt instruments such as bonds, debentures, and NCDs. Thus, the returns that you would derive from your portfolio will be in sync with your expectations and risk propensity. Risk profiling would help you build an efficient portfolio, which not only maximizes your returns, but also mitigates your risks largely while making you enjoy a customized investment experience that matches your financial goals and income.

 

To know more about ideal financial planning and investment,write to us at investmentz@acm.co.in

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