In my last article, we saw how debt fund can be used as an alternative to bank fixed deposit. Now lets take a look at what options are available while investing in debt funds. For investment in debt funds, one can choose between dividend payout and growth option.
In dividend payout option, any profit made by the fund is given back to the investor in the form of dividend e.g. If the face value of the fund is 10, NAV is 50 and it declares the dividend of 40%, then the investor will get a dividend of Rs 4. However NAV of the fund will drop down accordingly. Generally dividends are declared periodically but these are not guaranteed.
In growth option, fund house does not declare any dividend instead they reinvest any profit made.
With dividend payout option, liquidity (getting cash) is possible in two forms, selling units and periodic dividend. In this option you do not have to pay additional income tax on the dividend as DDT (Dividend Distribution Tax) is already deducted by the fund house at the time of declaring dividend.
However in growth option, one can get cash only after selling units of the fund. In this option, one need to pay income tax on the profit earned although for long term investment in growth option, one can get the benefit of indexation.
So if you need money periodically, you can choose the dividend payout option else go for growth option as it is a better way of wealth creation.