Glossary of Mutual Fund Terms
G-secs are a short form for Government securities that are issued by the government to finance its fiscal deficit. The government collects taxes from its citizens which is the primary source of revenue for the government. On the other hand, the government also spends on things like healthcare, education, defence and infrastructure. These expenses are funded by the taxes it collects from us. But when the expenses exceed the revenue it results in a fiscal deficit. In such a case, the government issues various kinds of debt securities to raise money from investors and use this money to finance its expenses. Debt securities issued by the Government are called G-secs.
G-secs are a debt obligation of the Government that promises to pay its holders (G-sec investors) a fixed or floating interest rate at periodic intervals and the initial invested amount or principal at the time of maturity. Since G-secs are issued by the government, they are considered safe as far as default risk is concerned i.e. the chances of the borrower or issuer (the Government in this case) failing to pay its obligations is remote.
G-secs with less than one-year maturity are called T-bills or Treasury bills and those with more than one year of maturity are referred to as Government bonds.
Mutual Funds provide different options to investors which they can choose depending on their financial requirement. A Growth Option focuses on long-term growth of capital. In case of the growth option, you choose not to opt for dividends.
Thus, if you invest in the growth option of a Mutual Fund scheme, you will not receive any intermediate payouts from the scheme. In a growth option, all profits made by the fund are reinvested into the scheme. This leads to an increase in the NAV of the scheme, since the profit is retained by the scheme instead of being distributed to the investors. When the scheme makes a profit, NAV of the scheme increases and vice-versa.
The only way an investor in a growth plan can realise profit is to sell his/her investment in the scheme. The return in a growth plan is calculated by taking the difference in NAV on the sale date and purchase date as there are no intermediate payments like dividends, interests, gains, bonus, etc.
A growth option investor experiences a higher capital gain at the time of redemption as compared to an investor who has opted for dividend option. Thus, the growth option investor will end up paying higher capital gains tax as compared to the dividend option investor for the same duration of investment. However, the dividend option investor has to bear the impact of Dividend Distribution Tax (DDT) which is the tax the fund house deducts from the dividend to be paid out. Since a DDT is deducted every time the scheme announces a dividend, this reduces the amount of money available for future reinvestment in case of a Dividend Reinvest option as compared to a Growth option where capital gain tax is levied only at the time of withdrawal. The DDT also reduces the dividend being received by the investor who has opted for Dividend Payout option.
A growth plan is suitable for those who are looking for the growth of their capital over the long-term and don’t look forward to intermediate payouts from the fund.