Ask Morningstar: Growth or Dividend option?

Mar 30, 2022

How does one choose between a growth option and a dividend option of a mutual fund?

Mutual funds pay dividends out of any investible surplus. When a fund house declares dividend, this dividend gets deducted from the Net Asset Value, or NAV. In essence, this is a return of your capital invested. This return of capital defeats the purpose of investing which is to grow your investment corpus.

Dividend options are used by investors seeking a regular income from their investments. Typically, retired folk who need a cash flow, or freelancers who deal with an unstable income, opt for dividends. If you have a steady income and are not dependent on your investment for periodic cash flow, you can go for the growth option.

What to note:

  • When it comes to dividend payout, you lose out on any gains that would have otherwise accrued on the income received. Hence, the corpus under the growth option would grow to a higher amount than one under the dividend option.
  • There is no guarantee on the amount or frequency of dividends. They are declared at the discretion of the fund manager and subject to distributable surplus.


Dividends are taxable in the hands of investors at their marginal rate of tax. Investors would therefore lose out on the favourable tax treatment on long-term capital gains offered by mutual funds. On this point, the growth option is better than the dividend payout option.

Till FY2019-20, companies deducted TDS before paying dividends to mutual funds. Subsequently, mutual funds also had to pay a dividend distribution tax (DDT) on dividends passed on to investors, which were then tax-free in the hands of investors. The Finance Act 2020 announced a change in taxation starting FY2020-21. Now, companies do not have to deduct a TDS amount while paying dividend to investors, including mutual funds. Mutual funds being pass through vehicles do not have to pay any tax on dividends received. However, now all dividends received (from both equity and other-than-equity oriented schemes) are taxed in the hands of the investors, at the marginal rate of tax, as applicable.

Additionally, mutual funds are required to deduct TDS (tax deducted at source) at 10% (excluding surcharge and cess) while distributing dividends exceeding Rs 5,000 to investors.

Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries ONLY relating to mutual funds and portfolio planning.


Add a Comment
Please login or register to post a comment.
© Copyright 2023 Morningstar, Inc. All rights reserved.
Terms of Use    Privacy Policy
© Copyright 2023 Morningstar, Inc. All rights reserved. Please read our Terms of Use above. This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
As of December 1st, 2023, the ESG-related information, methodologies, tools, ratings, data and opinions contained or reflected herein are not directed to or intended for use or distribution to India-based clients or users and their distribution to Indian resident individuals or entities is not permitted, and Morningstar/Sustainalytics accepts no responsibility or liability whatsoever for the actions of third parties in this respect.
Company: Morningstar India Private Limited; Regd. Office: 9th floor, Platinum Technopark, Plot No. 17/18, Sector 30A, Vashi, Navi Mumbai – 400705, Maharashtra, India; CIN: U72300MH2004PTC245103; Telephone No.: +91-22-61217100; Fax No.: +91-22-61217200; Contact: Morningstar India Help Desk (e-mail: in case of queries or grievances.