It’s confusing to make a choice between Mutual fund dividend and Mutual fund growth while investing. But once you've charted your needs and goals,and realized each one's advantages and disadvantages, making a rational decision at the crucial hour will be breezy. No single mutual fund is perfect for every investor.That's why there are so many out there with so many different options. When investing in a mutual fund, it's best to examine all of the particulars of the fund, to avoid investing in a fund that doesn't suit your individual requirements for growth or cash payout.
But why have different options?
You may know by now that a same mutual fund scheme can have two options: Mutual fund dividend and growth option. If you go further, you’ll learn that their NAVs are different and in most cases NAVs of dividend options are much lower than the growth option. So does it mean they are two different schemes? No, the scheme invests in the same set of stocks or bonds but the nature of distribution of profit differs. The behavior,objective, fund manager, performance are all the same but only the way your returns are delivered is different.
Mutual fund Dividend option Vs. growth option
Mutual fund growth: If you choose the growth option, profits made by the scheme will be invested back into it. So, when the scheme gains,the Net Asset Value (NAV) rises and in case of a loss, it goes down. The only option to get profit in the growth option is to sell or redeem your investments.
Mutual fund dividend: If you choose the dividend option, your profits will not be re-invested into the scheme. Instead, profits or dividends are distributed to the investor time to time (quarterly, half-yearly or yearly). There is no guarantee on the amount and frequency of dividends.Dividends are declared only when the scheme makes a profit, at the discretion of the fund manager. When a fund house declares dividend, this dividend gets deducted from the NAV (net asset value) of your Mutual fund dividend scheme.
Which one should you choose?
Flipping a coin at this point would be a bad idea. So what should you do when you know that the number of units is same in case of both growth and dividend payout?
The Mutual fund dividend option works best when assessment of the market seems high. When markets are up, the likelihood of the fund house declaring a dividend is higher, as making profits on investments becomes easier. In case you need regular cash flow from your investments, the dividend option will work for you.However, in the dividend payout you lose on compounding returns as the dividend you receive is not re-invested either by the scheme or the investor. The dividend payment doesn’t assure payments if the fund fails to generate any surpluses. If you’re looking for a regular income like in the case of a retired person, you should pitch for the dividend option.
Unlike the Mutual fund dividend option, the growth option reinvests the gains over and over again and the returns are compounded, resulting in higher proceeds at the time of maturity. So 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 about the taxes?
If you stay invested in a growth scheme for more than a year, your investment will be tax-free. Otherwise you’ll be charged the short-term capital gains tax. For those opting for a dividend option, the dividend declared by mutual funds would be tax-free at the hands of the unit holders. Dividend distribution tax is paid by the fund house.