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Direct, Regular, Growth or Dividend. Which do you need to pick?

by Money Puzzle   ·  August 30, 2019   ·  

Photo by Oladimeji Ajegbile from Pexels

My younger cousin recently reached out to understand how to start investing online. She reached up to the last step and then got confused. “There are so many options, I didn’t know what to choose.”

She’s right of course. If you have ever tried to invest in a mutual fund scheme, you would have found that the options against the same scheme are many. The typical ones are dividend, growth, regular, direct. In debt funds the options increase to daily dividend, weekly dividend and so on. In some schemes you may even find options like institutional, retail.

So, which should you pick? The answers are simple. Read on.

Growth Option

Ideally you will invest in equity schemes to create long term wealth rather than regular income and hence, you should pick the Growth option. This option is structured to reinvest any profits the fund makes back into the fund, which means that growth of your investment happens automatically. If you pick the dividend option, regular profits from the fund will be taken out and paid back to you as dividend income. Once that happens, the market price or daily net asset value (NAV) of your scheme will reduce by the amount of dividend paid per unit. The dividend you receive in your bank will most likely get spent. Basically, you will not get complete benefit from growth of equity assets. Moreover, the amount of dividend paid out is decided by the fund and you will not have any control on that quantum of that regular income.

Best to stick to Growth Option always in case of Equity Funds.

For debt funds, the purpose usually is short term parking of money. If you want regular income from a debt fund and your income tax bracket is less than the 30% slab, better to once again go with growth option. In choosing this option, you keep your tax incidence lower as dividend distribution for debt funds is taxable at 25% and is deducted by the scheme before you get the money in your bank. To generate regular income, you can partially redeem the number of units you require each month or schedule a systematic withdrawal plan in your debt fund scheme under the growth plan. The tax incidence on any gains from this transaction will be at your income tax rate if you have held the scheme for less than 3 years. Beyond that too taxation is more efficient for growth option.

In debt funds too stick to growth option, while here the look out is not for accumulation of profits or compounding, its more tax efficient to do so.

Direct versus Regular

This really depends on whether you are making the investment with the help of a advisor/distributor or by yourself. Mutual fund NAVs deduct a certain amount of annual expense per unit and what you get to buy or sell is net of that expense. The expense for the regular plan is higher than for the direct plan, hence, the value to the investor in a direct plan is higher as cost is lower. However, the reason that the expense is higher in the regular plan is because of commissions paid to advisors/distributors. If you are using the help of an advisor, its only fair that they get compensated for guiding you in making your investment choices.

Pick direct plan, if you are a do it yourself investor and the regular plan if you are being advised.

Many advisors also prefer the direct plan as they charge a separate advisory fee which considers their comprehensive financial planning service rather than a simple recommendation to buy or sell funds.

If your advisor is charging you a separate advisory fee, then pick the direct plan, else go with regular plan.

Usually, it is banks who act as distributors of mutual funds. There are other distributors who simply advise on which funds to buy or sell (both online and physical) and recommend the regular plan, because their compensation depends on the commission embedded in it rather than a separate advisory fee.

The institutional versus retail option is a simple choice, the distinction lies in how much your minimum investment can be. If you are investing large amounts, go with the institutional plan as the embedded expense is likely to be lower. For small amounts, you will have to pick the retail plan.

Next time you see multiple investment options for the same scheme, don’t get overawed, simply refer to this document and follow the logical steps.


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