What is a Growth Mutual Fund?
With a wide range of mutual fund schemes available for the investors, mutual funds emerge as a convenient investment option. The investors may choose mutual fund schemes to suit their risk profile, investment horizon, and financial goals.
However, even after the mutual fund scheme has been selected, the investors must choose to invest amongst the following two options of that mutual fund scheme:
1. Dividend Option :
Under such an option, the mutual funds may distribute dividends to the unitholders based on the fund's profits. As such, investors may measure the returns through the dividend payouts and capital appreciation in the NAV (Net Asset Value) of the fund.
2. Growth Option :
Under such an option, mutual funds aim for the growth of the investment portfolio by reinvesting the fund's profits into the scheme itself. As such, the returns may be measured through growth in the NAV of the mutual fund scheme. The investments in growth options of different mutual fund schemes are also generally referred to as growth funds.
Power of Compounding
While investing in growth funds, the investors may reap the benefits of compounding, as the returns generated by the funds are reinvested into the fund portfolio to generate further returns. The returns grow exponentially in contrast with the actual invested amount, as the holding period increases. This is because the earlier gains, which have been reinvested in the fund, generate additional profits.
In contrast, the dividend option returns may be distributed by the mutual funds as per the prevailing SEBI Regulations.
Taxation for Growth Funds
While the investors in dividend option may also be liable for taxes on dividend income at the regular tax rates, the investors in growth funds may only realise their gains through mutual fund units' redemption. The capital gains are calculated by deducting the redemption value from the invested amount.
If one has invested in growth option in equity funds, the cut-off period for classification of gains into Short Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) is 12 months, while the same is 36 months for other funds. STCG from equity funds is taxed at 15%, while the same is taxed at regular tax rates in case of other funds.
Similarly, LTCG is taxed at 10% for equity funds, while the same is taxed at 20% for other funds. While the investors in equity funds are not allowed indexation benefit in LTCG, an aggregate exemption of Rs. 1 lakh a year is permitted towards LTCG from equity shares and equity funds.
Switching from Dividend option to Growth option
While one may have invested in the dividend option earlier, he/ she may transfer the investments to growth option by making a switch transaction. However, one must remember that a switch transaction is considered equivalent to a redemption transaction from the dividend option with an immediate investment in growth option. Thus, investors must consider exit load implications and tax incidence while making such transactions.
Note: The tax provisions, as mentioned in the article, are for illustrative purposes only, and are updated as per the Finance Act 2020. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment.
Disclaimers: The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance act 2020. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.
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