When you opt for a dividend mutual fund plan, the fund regularly pays dividends depending on the profits, which in turn reduces the NAV of the fund. In most cases, investors do not reinvest these dividends and prefer to use for other purposes. This, in turn, diminishes their wealth creation capacity.
For long-term wealth creation, Growth Option is the best option due to the power of compounding. The profits generated by the growth option gets automatically reinvested by the fund.
Growth plans allow you to estimate returns, which enables you to predict long-term wealth creation amount. The mutual fund keeps you in sync with your financial planning.
Dividend option is best suitable for the retired section of the population and to those who are looking for regular income as it is characterised by low-risk appetite. If you have invested in dividend option, you will also attract Dividend Distribution Tax (DDT) at the interest rate of 29.12%, inclusive of surcharge & Cess.
In case of long-term capital gains earned from Growth Option, you will be charged at a tax rate of 10% if the earning is Rs. 1 lakh and it is held for more than a year. For short-term capital gains, the interest rate is set at 15% for holding less than a year.
The NAV of a fund in Growth option is high as compared to the dividend option. To invest in Growth option, you need to be a market-savvy person and have a high degree of risk tolerance. High risks mean high rewards.