What are Dividend and Growth options in a Mutual Fund?

Nutan Gupta

05 Oct 2016

Mutual Funds

If you are investing in mutual funds for the first time, there is a very high possibility of a question popping into your mind - Should I invest in growth option or dividend option? With a variety of schemes available on the internet, investors tend to get confused about the option they need to invest in. A lot of times investors know which scheme to invest in, but then they are not sure if they should invest in the growth or dividend option. One should understand what growth and dividend options are and invest wisely!

Growth Option in Mutual Fund

Under the growth option, all profits made by the fund are invested back into the scheme. An investor does not receive any intermediate payments in the form of bonus and dividends. An investor gets returns only on selling the units, which is determined by the net asset value (NAV) of the scheme. Under growth option, the NAV of the fund increases over a period of time which helps in capital appreciation, thereby giving you more returns.

The returns which an investor receives is the difference in NAV; NAV on the date of purchase and NAV on the date of sale. For example, Mr. A has bought 100 units of a fund at the NAV of Rs. 10, which means that he has invested a total of Rs. 1000 in the fund. Now, after a few years, the NAV of the fund becomes Rs. 14 and Mr. A wishes to sell all the units. Mr. A sells the units in Rs. 1400, making a profit of Rs. 400 in the scheme.

Growth option is suitable for investors who want to invest for a long term. Under growth option, the power of compounding works for an investor. Moreover, long-term capital gain is non-taxable in growth option. An investor is liable to pay tax on the short-term capital gain if he sells the units within one year.

Dividend Option in Mutual Fund

Under the dividend option, an investor receives regular income at periodic intervals in the form of a dividend. In this option, whenever the NAV of the fund reaches a certain level, the fund distributes the profit to its investors as dividend. Hence, the NAV of the fund does not change drastically at the time of selling the units. Also, the power of compounding is less in the dividend option.

For example, Mr. B has bought 100 units of a fund at the NAV of Rs. 10, which means he has invested a total of Rs. 1000 in the fund. After a few months, the NAV of the fund becomes Rs. 14 and it decides to pay Rs. 2 dividend to its investors. The investors will receive Rs. 200 as dividend and the NAV of the fund will come down to Rs.12.

Dividend option is suitable for investors who have a short-term investment horizon or they are looking for a regular income. However, the frequency of dividends is not guaranteed and sometimes, no dividend is declared throughout the year. As far as the tax implications are concerned, the dividend is tax-free in the hands of the investor. However, in debt mutual funds, asset management companies (AMCs) pay a dividend distribution tax (DDT) of 28.33% (including surcharge and cess) from the distributable income.

Parameters

Growth Option

Dividend Option

Characteristics All profits made by the fund are invested back into the scheme Investor receives regular income at periodic intervals in the form of a dividend
Intermediate Payments No Yes
Suitability Long-term Short-term
Capital Appreciation Power of compounding is more Power of compounding is less

Which option is better?

The choice of choosing any option purely depends on the investment objective of an investor. People who are in the higher age bracket and are looking for regular pay-outs from their investments can opt for dividend option and people who are young and want their investment to compound can look for growth option. Identify the best mutual fund option which best suits your financial needs.


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What are Dividend and Growth options in a Mutual Fund?

by User Not Found | Oct 05, 2016
Mutual Funds

If you are investing in mutual funds for the first time, there is a very high possibility of a question popping into your mind - Should I invest in growth option or dividend option? With a variety of schemes available on the internet, investors tend to get confused about the option they need to invest in. A lot of times investors know which scheme to invest in, but then they are not sure if they should invest in the growth or dividend option. One should understand what growth and dividend options are and invest wisely!

Growth Option in Mutual Fund

Under the growth option, all profits made by the fund are invested back into the scheme. An investor does not receive any intermediate payments in the form of bonus and dividends. An investor gets returns only on selling the units, which is determined by the net asset value (NAV) of the scheme. Under growth option, the NAV of the fund increases over a period of time which helps in capital appreciation, thereby giving you more returns.

The returns which an investor receives is the difference in NAV; NAV on the date of purchase and NAV on the date of sale. For example, Mr. A has bought 100 units of a fund at the NAV of Rs. 10, which means that he has invested a total of Rs. 1000 in the fund. Now, after a few years, the NAV of the fund becomes Rs. 14 and Mr. A wishes to sell all the units. Mr. A sells the units in Rs. 1400, making a profit of Rs. 400 in the scheme.

Growth option is suitable for investors who want to invest for a long term. Under growth option, the power of compounding works for an investor. Moreover, long-term capital gain is non-taxable in growth option. An investor is liable to pay tax on the short-term capital gain if he sells the units within one year.

Dividend Option in Mutual Fund

Under the dividend option, an investor receives regular income at periodic intervals in the form of a dividend. In this option, whenever the NAV of the fund reaches a certain level, the fund distributes the profit to its investors as dividend. Hence, the NAV of the fund does not change drastically at the time of selling the units. Also, the power of compounding is less in the dividend option.

For example, Mr. B has bought 100 units of a fund at the NAV of Rs. 10, which means he has invested a total of Rs. 1000 in the fund. After a few months, the NAV of the fund becomes Rs. 14 and it decides to pay Rs. 2 dividend to its investors. The investors will receive Rs. 200 as dividend and the NAV of the fund will come down to Rs.12.

Dividend option is suitable for investors who have a short-term investment horizon or they are looking for a regular income. However, the frequency of dividends is not guaranteed and sometimes, no dividend is declared throughout the year. As far as the tax implications are concerned, the dividend is tax-free in the hands of the investor. However, in debt mutual funds, asset management companies (AMCs) pay a dividend distribution tax (DDT) of 28.33% (including surcharge and cess) from the distributable income.

Parameters

Growth Option

Dividend Option

Characteristics All profits made by the fund are invested back into the scheme Investor receives regular income at periodic intervals in the form of a dividend
Intermediate Payments No Yes
Suitability Long-term Short-term
Capital Appreciation Power of compounding is more Power of compounding is less

Which option is better?

The choice of choosing any option purely depends on the investment objective of an investor. People who are in the higher age bracket and are looking for regular pay-outs from their investments can opt for dividend option and people who are young and want their investment to compound can look for growth option. Identify the best mutual fund option which best suits your financial needs.

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  1. Guest | May 29, 2017
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