Limit exposure to international funds at 10% of portfolio
It would be better to choose from developed markets
Which is a better option, growth or dividend reinvestment, for 3-5 years?
—Kamlesh Shah
Investors in mutual fund (MF) schemes have the option of choosing between growth and dividend options. Fund managers make investments with the fund’s corpus, and when such investments generate profits, they have the option of declaring dividends and distributing a portion of these profits (while redeploying the rest back into the scheme). Investors who have opted for the dividend option of the scheme will get such distributions. Those who opted for the growth option will see all such profits put back into the scheme’s portfolio without any distribution. Within the dividend option, there are two more choices—payout or reinvestment.
Investors who take the payout option will see the dividend amount sent to their bank account by the fund house. People who choose reinvestment will see the amount used to purchase units in the same scheme. So, the only difference between the growth and the dividend reinvestment options is the manner in which the investment grows.
In the case of growth option, the number of units remains the same while the value of each unit (net asset value) grows. In the case of dividend reinvestment, the value of each unit will decline when dividends are distributed, but the number of units will grow (as a result of reinvestment). At the end of the day, the result in terms of investment value would remain the same.
Choosing between these two options for a 3-5 year investment period should be considered from a taxation perspective. For debt funds, dividends attract a dividend distribution tax of 28.3%, which growth option investors will not incur. So for debt funds, it would be preferable to go with the growth option. For equity funds, too, growth option would be preferable, especially equity-linked savings funds.
I have been investing in six equity diversified funds for the past five years. Would it be wise to invest in some international funds via systematic investment plans (SIPs)?
—Ryan Almeida
If your portfolio has good, well-managed domestic equity funds that cover all the segments of the stock market, then having an international equity fund would be a good addition. There are periods when Indian equity funds perform poorly due to local economic factors, and during such times, international funds could deliver returns to compensate. However, there are two things to keep in mind here. One, such funds should be a small portion of your portfolio, say, about 10%. Two, it would be better to choose from developed markets such as the US or western Europe since that would provide meaningful diversification.
Queries and views at mintmoney@livemint.com
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