When choosing mutual funds, you may be faced with a big decision. Among the more baffling choices, you may have to make another miniscule choice. Whether you chose a mutual fund that offers a dividend option or one that provides a growth option. Both types have their set of advantages and disadvantages. Hence depending on your individual needs, your financial objectives and circumstances you can decide either option as the right fit.
If you have a demat account with a brokerage company such as Kotak Securities, you can take help of the research reports and expert guidance to simplify this and other choices as per your investment portfolio.
Dividend option – If you chose a dividend option, the dividends received from the equities by the mutual funds do not get reinvested into the funds. Rather, they are distributed equally among the investors.
Fund managers of a mutual fund scheme declare dividends as and when the scheme gets them. The dividend pay-out affect your NAVs as well. For instance, you invested Rs. 10 in an equity fund and the NAV of the mutual fund rises to Rs. 15 with unpaid the dividend amounts of Rs. 2. Then, after the dividend pay-out of Rs. 2, your NAV could reduce to Rs. 13.
Growth option – The growth option of a mutual fund works like a cumulative option. If the mutual fund scheme earns dividends, it does not pay them to you. Rather, these profits are accumulated and become part of the mutual fund scheme through reinvestment. Hence, when the mutual fund scheme earns dividends, its NAV begins to rise.
To receive any pay-out from the growth option of a mutual fund scheme, you need to sell its units. For instance, you purchased 100 units of an equity fund through the growth option. The NAV of the fund was at Rs. 40 at the time of purchase. Over one year, the scheme’s NAV rose to Rs. 50 of which the dividends amounted for Rs. 3. However, this dividend doesn’t get credited into your account; it rather goes into your mutual funds as reinvestment. If you want to redeem the dividend amount of Rs. 300 (100 units into Rs. 3 dividend), you would have to sell 6 units.
Deciding on a suitable option
You can go for either option depending on your investment needs. Historically, a dividend option is seen to perform best when markets are riding high. With a consistent rise of a mutual fund’s NAV, the prospects of the fund declaring dividends are higher.
However, if you are banking on your investments for a steady income, you may want to opt for the dividend option. It is essential to note here that you could lose out on the power of compounding as dividends are not reinvested back into the funds. Hence, as compared to the growth option of a mutual fund scheme, wealth accumulation could slow down with a dividend pay-out option.
If you have a long-term investment horizon, you can consider the growth option. It is useful in meeting long-term financial goals such as building wealth towards retirement. If you do not need dividends or a steady income, a growth option can be your best choice.