The Long Road To Prosperity

Among the key decisions that every equity fund investor has to make is to choose between growth and dividend options. While both have certain merits and demerits, it is important for an investor to understand what exactly these options offer before zeroing in on one of them. Needless to say, one’s investment objective i.e., to receive regular income or capital appreciation or both would be the fundamental deciding factor.

Under the dividend option, an investor receives dividend as and when the fund has distributable surplus. As per the current tax laws, dividend from an equity fund is tax free in the hands of investors. Under the growth option, no dividend is declared and the NAV moves up and down depending on the market movement. Therefore, one pays tax only when one sells units. The rate of tax will depend upon the amount of time the units were held. Remember, a combination of selecting good quality equity funds as well as the right option can go a long way in achieving the desired level of success. Though more and more investors are becoming aware of the crucial elements while making decisions, there are certain myths that continue to cloud this process. The following are a few of the illusions that investors should steer clear of:

In other words, if the dividend percentage and not the quality of the portfolio or its composition becomes the main criteria, one may end up investing in a fund that may not otherwise merit an investment. It is important to understand that dividend payments by the funds are a process of distributing gains to their unit holders and only those who remain in the fund for a considerable period benefit from it in the real sense. Therefore, it is not advisable to make dividend as the main criteria for making an investment in an equity fund. Many funds will be declaring dividends during the next 3-4 months and hence investors would do well to resist the temptation of investing in these funds just to receive dividends in a short span of time.