Dividend Reinvestment Calculator
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Growth Compounding vs Dividend Payout Growth
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Growth vs Dividend Payout Compounding
Compares growth plans (reinvesting returns) against dividend payouts where capital compounds at a lower rate.
Worked Example: ₹5 Lakhs over 15 years at 12% returns vs 3% dividend yield
Growth vs Payout: Why Devika Chose Compounding Over Regular Checks
Devika was comparing Growth vs Dividend Payout plans for a ₹5 Lakh mutual fund investment. The payout option was tempting: receiving a 3% annual dividend check felt like passive income. However, she had a 15-year horizon and didn't need immediate cash.
She chose the Growth plan. Over 15 years at 12% returns, her ₹5 Lakhs grew to ₹27.3 Lakhs. Had she chosen the Payout plan (with a 3% dividend yield and 9% capital growth), her capital would have grown to ₹18.4 Lakhs, and she would have received ₹8.1 Lakhs in total dividends (Total: ₹26.5 Lakhs).
By choosing Payout, Devika would have lost ₹80,000 to the lack of dividend compounding. Additionally, mutual fund dividends in India are now taxed at the investor's slab rate, making payouts less tax-efficient than long-term capital gains.
If you do not need monthly cash flow to meet living expenses, always choose the Growth option. Reinvesting your returns ensures maximum compounding efficiency and keeps your tax liability deferred until you actually redeem.
Frequently Asked Questions
What is the difference between Growth and Dividend Payout plans?
In a Growth plan, all profits generated by the fund are reinvested back, compounding your capital. In a Payout plan, profits are distributed periodically as dividends, meaning your capital grows slower.
Why does the Growth plan build more wealth?
Growth plans benefit from uninterrupted compounding. Because dividends are not pulled out, your entire return continues to generate further returns. Over 15 years, a Growth plan can easily beat a Payout plan by a wide margin.
How are mutual fund dividends taxed in India?
Dividends are added to your overall taxable income and taxed according to your individual income tax slab rate. Additionally, TDS is deducted at 10% for dividend payouts exceeding ₹5,000 in a financial year, making them highly tax-inefficient.
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