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Home / Money / Personal Finance /  Growth vs Dividend plan: Which is better for investment in mutual funds?
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I am 27 years old and I want to invest in mutual funds. Please suggest some schemes. Also, advise whether I should invest in growth plans or dividend plans.

-Name withheld on request

Given your age, I would suggest you invest at least 75% of your portfolio in equities. As equities beat fixed income securities by a wide margin over the long term, invest in equity funds for investment horizons exceeding 5 years. You can invest in the direct plans of these funds --- Tata Index Sensex Fund or HDFC Index Sensex Fund; and Mirae Asset Emerging Bluechip Fund and Parag Parikh Flexi Cap Fund --- through SIPs in equal proportion. Invest in the direct plans of --- Axis Long Term Equity Fund and Mirae Asset Tax Saver Fund --- if you need to claim tax deductions under Section 80C.

As equities as an asset class can be very volatile in the short term, invest in short duration debt funds for financial goals maturing within 5 years. Also, make sure you maintain an emergency fund to sustain unavoidable expenses for at least 6 months. You can invest in the direct plans of any of these short-duration funds -- HDFC Short Term Debt Fund or ICICI Prudential Short Term Fund -- for building your debt fund portfolio and for parking your emergency fund.

Always consider investing in growth options of mutual funds because of its higher wealth creation potential. As your contributions stay invested in the growth plans, the power of compounding sets in and the returns generated by your mutual funds starts generating returns on their own. The dividend option is also a sub-optimal choice, especially for those in the higher tax slabs, due to the tax treatment. Mutual fund dividend receipts are taxed as per the tax slab of the investor.

Naveen Kukreja - CEO& Co-founder, Paisabazaar.com. 

(Queries and views at mintmoney@livemint.com)

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