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Every mutual fund scheme comes in two types of plans – growth and dividend. The growth option gives returns in the form of rising values of mutual fund units. Whereas, under the dividend option returns are paid via periodic dividends.
Types of Mutual Fund Dividend Plans
The dividend plan of a mutual fund scheme is available in different varieties namely dividend payout, dividend reinvestment and dividend sweep. Under the dividend payout plan, the dividend declared is paid into your bank account. Whereas, the dividend reinvestment plan reinvests the dividend in the same fund that has declared the dividend and the dividend sweep plan invests the dividend in units of another mutual fund of the same fund house.
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Are Mutual Fund Dividends Same As Stock Dividends?
Mutual Fund and stock dividends are two different things. While stock dividends represent profits earned by a company, mutual fund dividends are not an indicator of the profitability of a mutual fund scheme. High mutual fund dividends do not mean that the fund is doing very well or otherwise. When a mutual fund scheme declares a dividend, the NAV (Net Asset Value) of the concerned scheme falls by a corresponding amount. For example, if a mutual fund with a NAV of Rs 20 declares a dividend of Rs. 2 per unit, the NAV of the scheme will fall to Rs. 18 per unit.
Hence, an investor should not invest in a mutual fund just because it pays high dividends and should think which plan of the scheme suits him/her more – growth or dividend.
When Are Mutual Fund Dividends Declared?
The right to decide the timing of declaration of dividend completely rests with a fund house. An investor has no say in it. However, an investor can control, when does he/she want to sell his/her mutual fund units and realise the involved capital gains, if any.
Tax Treatment – Growth vs Dividend Mutual Fund Plan
The growth and dividend plans of a mutual fund are taxed in the following manner:
Equity Funds
Dividends of equity mutual funds attract dividend distribution tax at 10%. This is slightly less than the short-term gains tax which growth mutual funds attract at 15% (for holding periods less than 1 year). However it is the same as the long-term capital gains tax which growth mutual fund attract at 10%.
Debt Funds
Dividends of debt mutual funds attract dividend distribution tax at 25% along with surcharge and cess which makes the total DDT reach nearly 29%. This is very close to the highest slab rate for income tax in India at 30%. In case of the growth option, the short term capital gains on non-equity funds (including debt funds) is paid as per the income tax slab rate. Hence if you are a 30% slab investor, you will pay almost the same tax on growth and dividend options. However, if you are a 10% or 20% slab investor, you will pay a lower tax on growth options of mutual funds. In case of long term capital gains tax on non-equity mutual funds, you pay 20% after indexation, regardless of your income tax slab. This is substantially lower than dividend distribution tax at 29%.
Bottom Line
The criteria deciding which is a better plan better plan between growth and dividend varies from investor to investor depending upon his/her investment object. However, on a general note, the growth option of mutual funds is better than the dividend option. The following are the reasons which make the growth option a better choice:
- Mutual fund dividends do not give an insight of the scheme’s performance as they are not an indicator of the profitability.
- Mutual fund dividends do not create value, they only distribute value. Thus, there is no wealth creation and appreciation under the dividend option.
- An investor has no say regarding the timing of declaration of mutual fund dividends.
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Mutual fund dividends attract higher tax rates than capital gains involved in the growth option of the mutual fund schemes in most scenarios.
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List of Top Performing Mutual Funds 2020
| Fund Name | Category | NAV | AUM (Cr) | Expense Ratio | 3 Year | 5 Year |
| Axis Bluechip Fund | Large Cap | 32.85 | ₹ 7,005 | 0.83% | 14.93% | 12.68% |
| Kotak Standard Multicap Fund | Multicap | 36.93 | ₹ 25,381 | 0.87% | 9.74% | 12.96% |
| HDFC Small Cap Fund | Small Cap | 40.8 | ₹ 8,209 | 0.90% | 7.81% | 11.75% |
| Franklin India Prima Fund | Mid Cap | 974.16 | ₹ 6,694 | 1.09% | 5.14% | 11.81% |
| Axis Long Term Equity Fund | ELSS (Tax Saver) | 46.76 | ₹ 19,236 | 0.93% | 12.01% | 13.46% |
| ICICI Prudential Bluechip Fund-Growth | Large Cap | 43.63 | ₹ 21,673 | 1.21% | 9.11% | 9.93% |
| SBI Magnum MultiCap Fund-Growth | Multicap | 51.45 | ₹ 7,549 | 1.07% | 9.16% | 12.90% |
| ICICI Prudential Equity & Debt Fund -Growth | Aggressive Hybrid | 137.86 | ₹ 23,288 | 1.21% | 7.49% | 10.24% |
| Aditya Birla Sun Life Tax Relief 96-Growth | ELSS (Tax Saver) | 31.44 | ₹ 8,562 | 1.08% | 7.54% | 11.76% |
| Motilal Oswal Multicap 35 Fund Regular-Growth | Multicap | 27.08 | ₹ 12,693 | 0.96% | 8.37% | 14.80% |
| DSP Equity Opportunities Fund-Growth | Large & MidCap | 217.209 | ₹ 5,166 | 1.95% | 6.61% | 10.75% |
| SBI Bluechip Fund-Growth | Large Cap | 41.31 | ₹ 21,484 | 1.07% | 6.91% | 10.70% |
| L&T India Value Fund-Growth | Value | 35.24 | ₹ 7,633 | 0.91% | 5.17% | 11.43% |
| L&T Tax Advantage Fund-Growth | ELSS (Tax Saver) | 53.25 | ₹ 3,153 | 1.54% | 6.36% | 9.50% |
| Mirae Asset Emerging Bluechip Fund Regular-Growth | Large & MidCap | 54.94 | ₹ 7,759 | 0.79% | 10.96% | 16.70% |
Best 5 Large Cap Equity Dividend Funds FY 2020
| Fund Name | 1 YR Return | 3 YR Return | 5 YR Return | NAV | Net Assets (Cr.) |
| JM Core 11 Fund | -12% | 6% | 9% | 8.34 | 50.88 |
| SBI Bluechip Fund | -6% | 5% | 10% | 37.29 | 22754.43 |
| Indiabulls Blue Chip Fund | -4% | 9% | 10% | 22.18 | 243.92 |
| Aditya Birla Sun Life Frontline Equity Fund | 5% | 6% | 9% | 228.41 | 22001.90 |
| ICICI Prudential Bluechip Fund | 10% | 10% | 10% | 44.16 | 22182.14 |
Best 5 Mid Cap Equity Dividend Funds FY 2020
| Fund Name | 1 YR Return | 3 YR Return | 5 YR Return | NAV | Net Assets (Cr.) |
| Kotak Emerging Equity Scheme | 8.59% | 5.98% | 13.49% | 40.03 | 4326.31 |
| Taurus Discovery (Midcap) Fund | -17.55% | 4.19% | 9.67% | 39.46 | 51.16 |
| Sundaram Mid Cap Fund | 0.30% | 1.34% | 9.80% | 447.52 | 6089.83 |
| L&T Midcap Fund | -0.16% | 6.42% | 12.32% | 131.18 | 4879.9 |
| DSP BlackRock Midcap Fund | 9.80% | 6.11% | 12.67% | 55.63 | 6320.35 |
Best 5 Small Cap Dividend Funds FY 2020
| Fund Name | 1 YR Return | 3 YR Return | 5 YR Return | NAV | Net Assets (Cr.) |
| SBI Small Cap Fund | 5.95% | 10.61% | 18.19% | 54.77 | 2188.23 |
| L&T Emerging Businesses Fund | -7.31% | 5.94% | 12.43% | 22.72 | 6177.32 |
| Aditya Birla Sun Life Small Cap Fund | -9.23% | -1.42% | 8.72% | 31.34 | 2486.85 |
| DSP Small Cap Fund | -2.90% | -1.87% | 10.03% | 51.43 | 5272.86 |
| Franklin India Smaller Companies Fund | -3.92% | 2.83% | 10.26% | 53.47 | 7576.97 |
Top 5 Diversified/Multi Cap Equity Dividend Funds FY 2020
| Fund Name | 1 YR Return | 3 YR Return | 5 YR Return | NAV | Net Assets (Cr.) |
| Kotak Standard Multicap Fund | 11% | 10% | 13% | 37.09 | 26010.02 |
| Mirae Asset India Equity Fund | 10% | 11% | 13% | 52.78 | 13064.85 |
| Motilal Oswal Multicap 35 Fund | 14% | 9% | 15% | 27.22 | 13634.94 |
| JM Multicap Fund | 19% | 11% | 13% | 35.67 | 2015.28 |
| SBI Magnum Multicap Fund | 13% | 9% | 13% | 51.6 | 7582.94 |
Top 5 Dividend Equity Linked Saving Funds FY 2020
| Fund Name | 1 YR Return | 3 YR Return | 5 YR Return | NAV | Net Assets (Cr.) |
| Tata India Tax Savings Fund | 14% | 9% | 14% | 18.95 | 1873.40 |
| IDFC Tax Advantage (ELSS) Fund | 1% | 8% | 10% | 55.19 | 2062.88 |
| DSP Tax Saver Fund | 14% | 9% | 12% | 50.66 | 5642.77 |
| Aditya Birla Sun Life Tax Relief ’96 | 2% | 8% | 12% | 31.58 | 8912.66 |
| L&T Tax Advantage Fund | 0% | 7% | 10% | 53.34 | 3420.69 |
Best 5 Sector Equity Dividend Funds FY 2020
| Fund Name | 1 YR Return | 3 YR Return | 5 YR Return | NAV | Net Assets (Cr.) |
| ICICI Prudential Banking and Financial Services Fund | 13% | 11% | 16% | 65.75 | 3298.81 |
| Aditya Birla Sun Life Banking And Financial Services Fund | 10% | 9% | 17% | 29.3 | 1863.65 |
| Sundaram Rural and Consumption Fund | 7% | 6% | 13% | 41.86 | 2347.08 |
| IDFC Infrastructure Fund | 1% | 4% | 7% | 14.91 | 977.44 |
| Franklin Build India Fund | 8% | 7% | 12% | 42.16 | 1316.55 |
Best 5 Dividend Balanced/Hybrid Funds FY 2020
| Fund Name | 1 YR Return | 3 YR Return | 5 YR Return | NAV | Net Assets (Cr.) |
| Edelweiss Arbitrage Fund | 7% | 7% | 7% | 14.64 | 3482.22 |
| Aditya Birla Sun Life Equity Hybrid 95 Fund | 4% | 5% | 9% | 780.71 | 13083.50 |
| SBI Equity Hybrid Fund | 14% | 10% | 12% | 146.26 | 30028.10 |
| DSP Equity and Bond Fund | 14% | 8% | 12% | 164.44 | 6360.93 |
| Reliance Arbitrage Fund | 7% | 7% | 7% | 20.35 | 8534.74 |
Best 5 Dividend Short Term Debt Funds FY 2020
| Fund Name | 1 YR Return | 3 YR Return | 5 YR Return | NAV | Net Assets (Cr.) |
| Reliance Short Term Fund | 11% | 7% | 9% | 37.98 | 658528% |
| Aditya Birla Sun Life Short Term Opportunities Fund | NA | NA | NA | NA | 337931% |
| Axis Short Term Fund | 11% | 8% | 9% | 22.37 | 261795% |
| HDFC Short Term Debt Fund | 10% | 8% | 8% | 21.89 | 795571% |
| L&T Short Term Bond Fund | 11% | 8% | 8% | 19.3 | 400240% |
Best 5 Dividend Gilt Funds FY 2020
| Fund Name | 1 YR Return | 3 YR Return | 5 YR Return | NAV | Net Assets (Cr.) |
| Reliance Gilt Securities Fund | 17% | 9% | 12% | 28.92 | 97502% |
| UTI Gilt Fund | 15% | 9% | 11% | 45.25 | 51049% |
| SBI Magnum Gilt Fund | 16% | 8% | 11% | 45.79 | 141769% |
| ICICI Prudential Gilt Fund | 12% | 7% | 10% | 71 | 109353% |
| Canara Robeco Gilt Fund | 13% | 7% | 10% | 56.25 | 7949% |
Also Read: Growth Vs Value Funds