I have always held a view that there should be no “dividend” plan at all in mutual funds. Remember in a company you get dividends and this is over and above the shares that you hold..so there could be some sense of taking a dividend. However in a mutual fund the Amcs are CHEATING you by using an old word that means something else.

What the Amc is doing is a “distribution” – a part of the money that you receive could be coming from your capital. So it NEVER, EVER made sense to take a dividend.

Earlier if you invested in a debt fund and got a dividend, this is what happened.

Let us say you had Rs. 200,000 in a debt fund which declared Rs. 5000 as dividend. You think you will get Rs 5000 and the value of the debt fund will remain at Rs. 200,000?

No. Wrong on both counts. You will get Rs. 5000 MINUS a withholding tax of 28.8% (this is close to the highest rate of tax) and thus you will get Rs. 3558 – the remaining is gone as tax. Remember this is not even TDS, you will not be allowed to claim that amount as a deduction. The amount in your hand is “tax-free” but remember you already have paid an atrocious 28% tax! So yes, your NAV will fall from the Rs. 100,000 to Rs. 95000, but you will get less than Rs. 5000.

So it did not make any sense to be in the dividend plan for a debt mutual fund. However for doing STP you did put money in a growth plan or a daily dividend plan. At least in a dividend plan you did not have to compute the capgains on a daily basis.

In equities people would go for “dividend- reinvestment scheme” – which meant a dividend was declared and the dividend was re-invested in your fund. Made some sense, but it still meant you paid some STT (securities transaction tax). It always made sense to go for the growth option.

In the recent budget the gov has introduced a capital gains tax – and therefore a dividend tax – of 10%. So if you got a dividend declaration of Rs. 1000, you would get Rs. 900 MINUS THE stt. Surely not worth it.

Go ahead write a simple letter and shift from dividend plans to growth plans.

If you need money on a regular basis, do a SWP – remember there will be some capital gains tax that you will have to pay. Do remember the dividends are tax free till Rs. 100,000 and after that you will pay 10% tax.

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