"Since I am retired, I need regular income to meet my daily expenditure. I can't afford to stash away my money for a very long time", he says.

Simple enough, but choosing the right plan is an important part of asset allocation. Most mutual fund schemes offer three plans - dividend, dividend reinvestment and growth. Your choice will depend on your financial goals. Do you prefer dividends in your hands or want to see your money grow over a period of time. Since choosing the right plan also has tax implications, Outlook Money gives you a definitive guide on how to choose a plan that is best for you.

Debt funds

You invest in debt funds because capital conservation and regular income are your objectives. But every time your debt fund pays you dividend, it pays tax out of the dividend declared and you get the remaining amount. Debt funds also impose short-term capital gains tax, depending on your income tax bracket, if you withdraw your units before one year, and long-term capital gains of 10 per cent for investments longer than one year.

Pheroze Bhathena 77 Retired 5 per cent of Bhathena's investment is in dividend plans of diversified equity funds  "I need regular income to meet daily expenditure. I can't afford to stash away money for long periods"

Stick to the dividend plan if you are investing for less than a year. For investors in higher tax brackets of 22.44 per cent and 33.66 per cent (all tax figures include surcharges), the divided plan is more tax-efficient with only 14.03 per cent dividend distribution tax. (See: Up The Ladder). If you invest Rs 10,000 in a debt fund that appreciates by 10 per cent and distributes all its gains as dividends, you end up with Rs 10,877 after a year as against Rs 10,667 in a growth plan.

Although dividend plans are more tax-efficient than growth plans for investments less than a year, what if you are not looking at dividends on a regular basis? Then opt for the dividend reinvestment option. Every time your debt fund declares dividends, it gets reinvested and an equivalent amount of units get added to your total number of units.

For investments of more than a year, in a growth plan you pay 11.22 per cent long-term capital gains tax as against 14.03 per cent as dividend distribution tax. For an investment of Rs 10,000 that appreciates by 10 per cent in a year, your growth plan will return Rs 10,888 as against Rs 10,877 by the dividend plan.

Ruthesh Ganesan 25 Banker Ganesan invests Rs 20,000 per month in six SIPs of diversified equity funds and 80 per cent of his investments are in equity funds "Given my income, age and background, I do not need liquidity"

Regular income or tax savings? Tax compulsions aside, opt for the dividend plan if you want regular income, even if you are investing in debt funds for more than a year. Arjun Marfatia, CEO, Quantum Mutual, says, "Choosing tax-efficient options should not come at the cost of your financial goals."

Equity Funds

Not only are dividends from equity funds tax-free in the hands of the investor, the fund also does not pay any dividend distribution tax. An investment of Rs 10,000 in a diversified equity fund that grows by 10 per cent in a year and distributes it entirely as dividends, will yield Rs 11,000 under all three plans, if you hold your units for more than a year.

Your financial goal is important when it comes to choosing a plan in equity funds. Take 25 year-old banker Ruthesh Ganesan. About 80 per cent of his investments lie in equity funds. He saves regularly and invests Rs 20,000 every month in six diversified equity funds' Systematic Investment Plans. "Given my current income, age and my background, I don't need liquidity. I go for the growth plan", he says.

If long-term wealth accumulation is what you are looking for then opt for the growth plan in equity funds. If you want to book profits periodically, opt for dividend plans, as equity funds are subject to market volatility.

If you had invested Rs 10,000 in HDFC [Get Quote] Equity Fund's growth plan on January 1, 1999 at an NAV of Rs 9.29 and withdrawn it on December 31, 2001 when the NAV was Rs 18.35, your investment would have grown 25.74 per cent. However, between 1999 and 2001, the scheme declared four dividends of 16, 20, 30 and 17 per cent.

Had you invested in the scheme's dividend plan, you would have got a compounded annualised growth of 28 per cent because an equity fund's dividend plan distributes profits that it earns from the markets, while a growth plan doesn't.

A word of caution: If you are investing in an Equity-Linked Savings Scheme, avoid dividend reinvestment. As ELSS locks your money for three years, each dividend that is reinvested is also locked for three years. In effect, you may never fully be able to withdraw your investment.

Up The Ladder
	Plan
	Dividend	Growth
For debt funds < 1yr
Amount invested	10,000	10,000
Net dividend received	877	Nil
Tax distribution (DDT/Cap. gains)	123	333
NAV at the end of 12 months	10	11
Net amount at redemption	10,877	10,667
For debt funds > 1yr
Amount invested	10,000	10,000
Net dividend received	877	Nil
Tax distribution	123	112
NAV at the end of 12 months	10	11
Net amount at redemption	10,877	10,888
For equity funds > 1yr
Amount invested	10,000	10,000
Net dividend received	1,000	Nil
Tax distribution	Nil	Nil
NAV at the end of 12 months	10	11
Net amount at redemption	11,000	11,000
All figures are in Rs.  In the examples, the initial investment is invested at Rs 10 NAV. This grows by 10%, and the scheme distributes all its gains as dividend