Smart things to know: Structuring returns from mutual funds

One can structure the investments in a mutual fund in a way that the returns are suitable to one’s income needs, appreciate to the required extent, or can be maximised after tax deduction.

Choose the growth or dividend reinvestment option in an equity fund to generate long-term capital appreciation. Both are tax-efficient since the dividend and long-term capital gains from equity funds are exempt from tax.

Choose the dividend option if you want to redeem the equity fund units before the completion of a year as the dividend is tax-free and the capital gain taxed on redemption will be lower.

If the investments are to be held for more than a year, choosing the growth option and systematically redeeming units is an option to generate regular, tax-free income.

Choose the dividend option to generate income from debt funds if the marginal rate of tax applicable to the investor is higher than the dividend distribution tax ( DDT) applicable on the dividend.

The impact of exit loads on redeeming units need to be considered while assessing the efficiency of the options available in order to maximise the post-tax returns.

The content on this page is courtesy Centre for Investment Education and Learning ( CIEL).