Should Senior Citizens Switch To A Dividend Option From Growth Option In Mutual Funds?
May 28, 2019

Author: Rounaq Neroy

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I'm a senior citizen based in Pune, having a sizeable mutual fund portfolio. Since the time I started investing, I always chose the Growth Option over the Dividend Option (Pay-out). I'm happy with the overall performance of my portfolio. But now that I'm 65 years of age, I plan to switch to the Dividend Option, so that I can use the dividends for my retirement needs. What's your view - is it advisable?

-- Deepak Kale

The decision to switch from a Growth Option to a Dividend Option (Pay-out) of a mutual fund scheme/s needs to be based on your cash-flow needs and after weighing the tax implications.

Do note that a switch from a Growth Option to a Dividend Pay-out option is considered as redemption of old units, and hence will attract tax --- a Short Term Capital Gain (STCG) tax or Long Term Capital Gain (LTCG) tax, whichever the case may be.

In case of equity-oriented mutual fund schemes that are held for a period of less than 12 months, the gains, if any, called as STCG gains will be taxed @15%. Whereas, if it is a non-equity oriented scheme, the STCG holding period will be considered to be less than 36 months, and the gains (if any) will be taxed at the marginal rate of taxation, i.e. as per your tax slab.

On the other hand, in case of equity-oriented scheme/s where the holding period is 12 months or more, the gain, if any, known as the LTCG gain in excess of Rs 1 lakh will be taxed @10% without indexation benefit (provided such units is subject to Securities Transaction Tax).

Whereas if it a non-equity oriented scheme, the LTCG gains, i.e. where the holding period is 36 months or more, will be taxed @20% after indexation (wherein rise in the cost of living, called as inflation, is factored in).

In addition, when you shift to the Dividend Option (Pay-out), in case of an equity-oriented mutual fund scheme, the dividend declared is subject to a 10% Dividend Distribution Tax (DDT) as per the current tax laws, although in the hands of the investor it is tax-free. This, therefore, brings the Dividend Option and Growth Option almost on par with each other.

Dividends are often touted to be a benefit because it is tax-free income; however, dividend payouts will get in the way compounding.

Another important point to note is dividends cannot be construed as a regular source of income. Mutual fund houses and their schemes do not guarantee regular dividends. Keep in mind that there isn't a set schedule for the payment of dividends, nor are the dividend rates predictable. If a mutual fund scheme falters as a result of the negative undercurrents, dividends may be hindered as a consequence.

[Read: 7 Investment Avenues for Your Post-Retirement Portfolio]

Declaring dividends is at the discretion of the fund house and based on the performance of a respective mutual fund scheme. This is why you cannot depend on dividends declared by the mutual fund scheme/s for regular income/cash flow.

Remember that frequent dividend declaration by a mutual fund scheme is in no way an indicator of the scheme's performance. Often, the dividend-adjusted return is nowhere close to the returns clocked under the Growth Option.

Instead, to address your cash-flow needs during retirement, consider the Systematic Withdrawal Plan offered by mutual funds.

[Read: Systematic Withdrawal Plan - The Ideal Option For Your Retirement Needs]

Through the Systematic Withdrawal Plan, you can make regular withdrawals (say monthly, quarterly, half-yearly and annually) of a fixed amount and continue to stay invested over a period to clock returns on your remaining investment amount. Further, you stand to gain under the SWP facility because of market volatility.

So, while your mutual fund distributor/agent may be showing you the dividend track record of a mutual scheme, don't get carried away and take imprudent decisions.

Editor's Note: To ensure that volatile market conditions aren't taking a toll on your financial goals, I strongly recommend that you avail of PersonalFN's Mutual Fund Portfolio Review service.

Through this service, our investment adviser will give your portfolio the personalized attention it deserves by reviewing your existing mutual fund investments and then recommending the future course of action.

With our in-depth analyzed recommendations, creating an optimal mutual fund portfolio will be a cakewalk.

Happy Investing!

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