What are they?
Most mutual fund (MF) schemes have dividend and growth options. The dividend option gives out a cash flow by liquidating some units periodically, while the growth option allows the money to stay invested. While filling the form, if you forget to choose one, your fund will allot you the default option, which may not be the one you really want.
How to choose?
MFs pay dividends whenever your investments earn a profit that they can pay out. If you need periodic dividends as a source of income from, say, debt funds, or if you feel the need to periodically book profits in your equity funds, choose the dividend plan.
Which is a better plan?
Neither. Dividends come out of your own pocket. When a fund declares dividend, its net asset value (NAV) comes down by that extent. If a fund’s NAV goes up to Rs15 and it declares Rs3 dividend, the NAV drops to Rs12. Dividends are good for those who reinvest them effectively or those who need them as current income.
Dividends from equity-oriented funds, which invest at least 65% in equities, are tax-free. Dividends from liquid funds are taxed at 28.325%, including surcharge and cess. Dividends from other debt funds are taxed at 14.163%. Tax treatment should always come second to your needs.