{"id":6984,"date":"2017-08-21T08:00:43","date_gmt":"2017-08-21T02:30:43","guid":{"rendered":"http:\/\/www.apnaplan.com\/?p=6984"},"modified":"2017-08-21T08:20:30","modified_gmt":"2017-08-21T02:50:30","slug":"investing-in-arbitrage-fund-growth-or-dividend-reinvestment","status":"publish","type":"post","link":"https:\/\/www.apnaplan.com\/investing-in-arbitrage-fund-growth-or-dividend-reinvestment\/","title":{"rendered":"How to Choose between Growth or Dividend Reinvestment while Investing in Arbitrage Fund:?"},"content":{"rendered":"

Arbitrage mutual funds are good investment option for short term<\/a>, especially for someone\u00a0in higher tax bracket. The reason being their pre-tax return is comparable to the\u00a0bank fixed deposits but is tax free if invested for more than 1 year and taxed at 15.45% if redeemed before 1 year of investment. interest on FDs are taxed at marginal tax rates.<\/p>\n

While investing in mutual funds an investor has to choose between two options:<\/p>\n

    \n
  1. Growth<\/li>\n
  2. Dividend (Reinvestment\/\u00a0Payout)<\/li>\n<\/ol>\n

    In this post we find out which option – Growth Vs Dividend should you choose while investing in Arbitrage Mutual Funds.\u00a0<\/strong>Here is an example.<\/p>\n

    We assume that Amit wants to invest Rs 1 Lakh in IDFC Arbitrage Fund (Direct Plan)<\/strong>. He is confused between Growth or Dividend Reinvestment \u2013 as which would be more beneficial for him. We take two cases :<\/p>\n

      \n
    1. when the investment horizon is less than 1 year and<\/li>\n
    2. when it\u2019s more than 1 year<\/li>\n<\/ol>\n

      Also Read:\u00a0<\/strong>Use SWP in Debt Funds to generate Regular Income<\/a><\/p><\/blockquote>\n

      Case 1: Investment for less than 1 Year<\/h2>\n

      Amount to be invested: Rs 1 Lakh<\/p>\n

      Investment Date: April 1, 2015<\/p>\n

      Redemption Date: November 30, 2015<\/p>\n

      Let\u2019s see how the returns change for Growth and Dividend Reinvestment options:<\/p>\n

      Growth Option:<\/h3>\n

      NAV as on April 1 = Rs 18.497<\/p>\n

      Units Purchased =\u00a0 1,00,000\/ 18.497 = \u00a05,406.28<\/p>\n

      NAV as on November 30 = Rs 19.3706<\/p>\n

      Redemption Amount = 5,406.28 X 19.3706 = \u00a0Rs 104,722.93<\/p>\n

      Capital Gains = 104,722.93 \u2013 1,00,000 = Rs 4,722.93<\/p>\n

      Since the investment was for less than 1 year, this is Short term capital gains. The gain would be taxed at 15.45%.<\/strong><\/p>\n

      \n

      Also Read:\u00a0<\/strong>How are Mutual Funds Taxed?<\/a><\/p>\n<\/blockquote>\n

      Tax to be paid = 15.45% X 4,722.93 = Rs 729.69<\/p>\n

      Net gains after tax = 4,722.93 – 729.69 = Rs 3,993.24<\/p>\n

      Total amount after tax = 1,00,000 + 3,993.24 = Rs 1,03,993.24<\/strong><\/p>\n

      Dividend Reinvestment Option:<\/h3>\n

      NAV as on April 1 = Rs 12.7146<\/p>\n

      Units Purchased =\u00a0 1,00,000\/ 12.7146 =\u00a0 7,864.97<\/p>\n

      In case of dividend reinvestment, fresh units are purchased every time dividend is declared by the fund. The gain happens in terms of increase of number of units.<\/strong> The fund has declared dividend every month as shown\u00a0in the table below:<\/p>\n

      \"Mutual
      Mutual Fund Units accumulation under Dividend Reinvestment<\/strong><\/figcaption><\/figure>\n

      By November 30, the numbers of units increase from 7,864.97 to 8,165.68.<\/p>\n

      NAV as on November 30 = Rs 12.8246<\/p>\n

      Redemption Amount = 8,165.68 X 12.8246 = Rs 1,04,721.52<\/p>\n

      \n

      Also Read:\u00a0<\/strong>Why Investing in Mutual Fund NFOs is Bad Idea?<\/a><\/p>\n<\/blockquote>\n

      Gain = 1,04,721.52 \u2013 1,00,000 = Rs 4,721.52 All this is not capital gains but due to dividend. We would break this into capital gains and dividend gains.<\/p>\n

      Capital gains for each purchase of dividend reinvestment would be calculated separately as in the table below.<\/p>\n

      \"Capital
      Capital Gains Calculation for Dividend Reinvestment in Arbitrage Mutual Fund for less than 1 Year<\/figcaption><\/figure>\n

      The total Capital gains = Rs 884.06 (Short Term)<\/p>\n

      Tax on capital gains = 15.45% X 884.06 = Rs 136.59<\/p>\n

      Total amount after tax = 1,04,721.52 – 136.59 = Rs 1,04,584.94<\/strong><\/p>\n

      As can be seen Dividend Reinvestment Option is better than Growth option for Arbitrage funds if the investment duration is less than 1 year.<\/strong><\/span><\/p>\n

      Also Read:\u00a0<\/strong>How to invest in DIRECT Plan of Mutual Funds?<\/a><\/p><\/blockquote>\n

      Case 2: Investment duration is more than 1 Year<\/h2>\n

      Amount to be invested: Rs 1 Lakh<\/p>\n

      Investment Date: April 1, 2015<\/p>\n

      Redemption Date: April 4, 2016<\/p>\n

      Let\u2019s see how the returns change for Growth and Dividend Reinvestment options:<\/p>\n

      Growth Option:<\/h3>\n

      NAV as on April 1, 2015 = Rs 18.497<\/p>\n

      Units Purchased =\u00a0 1,00,000\/ 18.497 = \u00a05,406.28<\/p>\n

      NAV as on April 4, 2016 = Rs 19.8352<\/p>\n

      Redemption Amount = 5,406.28 X 19.8352 = \u00a0Rs 1,07,234.69<\/p>\n

      Capital Gains = 1,07,234.69 \u2013 1,00,000 = Rs 7,234.69<\/p>\n

      Since the investment was for more than 1 year, this is Long term capital gains and hence tax free.<\/strong><\/p>\n

      Tax to be paid = 0<\/p>\n

      Total amount after tax = Rs 1,07,234.69<\/strong><\/p>\n

      Also Read:<\/strong>\u00a0Where to Park Money for Very Short Term [less than 6 Months]?<\/a><\/p><\/blockquote>\n

      Dividend Reinvestment Option:<\/h3>\n

      NAV as on April 1 = Rs 12.7146<\/p>\n

      Units Purchased =\u00a0 1,00,000\/ 12.7146 =\u00a0 7,864.97<\/p>\n

      Calculating the same way as we did in the case above –\u00a0By April 4, 2016 the numbers of units increase from 7,864.97 to 8280.24<\/p>\n

      NAV as on April 4, 2016 = Rs 12.9504<\/p>\n

      Redemption Amount = 8280.24 X 12.9504= Rs 1,07,232.51<\/p>\n

      Gain = 1,07,232.51 \u2013 1,00,000 = Rs 7,232.51. This has gains from short term, long term capital gains and gains due to dividend. We would break this into capital gains and dividend gains.<\/p>\n

      \"Capital
      Capital Gains Calculation for Dividend Reinvestment in Arbitrage Mutual Fund<\/strong><\/figcaption><\/figure>\n

      As seen in the table there is Rs 1,854.56 Long Term capital gains which are tax free.\u00a0 Rs 62.98 is Short Term Capital Gains which would be taxed at 15.45%.<\/p>\n

      Tax on Short Term Capital Gains = 15.45% X 62.98 = Rs 9.73<\/p>\n

      Total amount after tax = 1,07,232.51 – 9.73 = Rs 1,07,222.78<\/strong><\/p>\n

      As can be seen Growth option is marginally better than Dividend reinvestment option for Arbitrage funds if the investment duration is more than 1 year.<\/strong><\/span><\/p>\n

      The point to note is as the duration of investment increases further Growth option would turn out to be more beneficial.<\/p>\n

      Also Read:\u00a0<\/strong>SIP Vs. Lumpsum \u2013 Which is the Best way to Invest in Mutual Fund?<\/a><\/p><\/blockquote>\n

      Recommendation:<\/h2>\n

      To summarize Dividend reinvestment in Arbitrage\u00a0Mutual\u00a0Fund option is better than growth in case the investment\u00a0duration is less than 1 year. For more than 1 year, growth option is better.<\/strong><\/span><\/p>\n

      This is true for all tax brackets as dividend paid on arbitrage fund is tax free.<\/span><\/strong><\/p>\n

      In case of debt mutual funds<\/strong>, the calculation would happen on similar lines but there is dividend distribution tax of 28.84% (25% + 12% Surcharge + 3% Cess)<\/a>. So Dividend reinvestment is better only for people in 30% tax bracket and investment duration of less than 3 years. For all others Growth option is the right option<\/strong> (More details in another post\u2026).<\/p>\n

      As you can see the tax computation of dividend reinvestment is complicated, so if you want to keep your life simple choose growth option.<\/p>\n","protected":false},"excerpt":{"rendered":"

      Arbitrage mutual funds are good investment option for short term, especially for someone\u00a0in higher tax bracket. The reason being their pre-tax return is comparable to the\u00a0bank fixed deposits but is tax free if invested for more than 1 year and taxed at 15.45% if redeemed before 1 year of investment. interest on FDs are taxed […]<\/p>\n","protected":false},"author":1,"featured_media":8622,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_uag_custom_page_level_css":"","site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"footnotes":""},"categories":[3013,4],"tags":[3006,3007,3005,745],"uagb_featured_image_src":{"full":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2016\/04\/Arbitrage-Fund-Growth-or-Dividend-Option-\u2013-Which-is-Better.png",1026,551,false],"thumbnail":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2016\/04\/Arbitrage-Fund-Growth-or-Dividend-Option-\u2013-Which-is-Better-150x150.png",150,150,true],"medium":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2016\/04\/Arbitrage-Fund-Growth-or-Dividend-Option-\u2013-Which-is-Better-300x161.png",300,161,true],"medium_large":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2016\/04\/Arbitrage-Fund-Growth-or-Dividend-Option-\u2013-Which-is-Better-768x412.png",768,412,true],"large":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2016\/04\/Arbitrage-Fund-Growth-or-Dividend-Option-\u2013-Which-is-Better-1024x550.png",1024,550,true],"1536x1536":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2016\/04\/Arbitrage-Fund-Growth-or-Dividend-Option-\u2013-Which-is-Better.png",1026,551,false],"2048x2048":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2016\/04\/Arbitrage-Fund-Growth-or-Dividend-Option-\u2013-Which-is-Better.png",1026,551,false],"yarpp-thumbnail":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2016\/04\/Arbitrage-Fund-Growth-or-Dividend-Option-\u2013-Which-is-Better.png",120,64,false]},"uagb_author_info":{"display_name":"Amit","author_link":"https:\/\/www.apnaplan.com\/author\/admin\/"},"uagb_comment_info":4,"uagb_excerpt":"Arbitrage mutual funds are good investment option for short term, especially for someone\u00a0in higher tax bracket. The reason being their pre-tax return is comparable to the\u00a0bank fixed deposits but is tax free if invested for more than 1 year and taxed at 15.45% if redeemed before 1 year of investment. interest on FDs are taxed…","_links":{"self":[{"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/posts\/6984"}],"collection":[{"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/comments?post=6984"}],"version-history":[{"count":0,"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/posts\/6984\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/media\/8622"}],"wp:attachment":[{"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/media?parent=6984"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/categories?post=6984"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/tags?post=6984"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}