Growth vs Dividend
You may have come across the Growth vs Dividend dilemma in Mutual Funds while researching. It is often one of the most confusing questions that plague the minds of first-time investors. Are you still wondering what the pros and cons of the growth option and dividend option could be? Which option could offer you better returns? Here’s some clarity!
Mutual Funds offer two types of schemes to their investors: Growth option and Dividend option.
Well, it’s not that complicated. Once you have identified your investment objectives and goals, the options help you with your investment.
What’s your investment objective?
If regular income is your objective, then the dividend option is best suited for you. If you wish to create wealth for a long time, then the growth option will help you with your investment objective.
Both of these options come with their share of advantages and disadvantages.
Mutual Funds with Growth Option
If you invest in a mutual fund with growth option, you will not receive any dividends from the investment. However, this option allows the Asset Management Company (AMC) to reinvest the amount. When the scheme is in the profitable stage, the Net Asset Value (NAV) of the mutual fund increases, if the scheme experiences loss, the NAV decreases.
For example, if you purchase 100 units of a mutual fund with a growth option at a NAV of INR 40. In one year, the NAV of the fund increases to INR 50. You decide to sell the units. You receive a total of INR 5,000 (50 x 100). The profits, thus, generated from this investment amount to INR 1,000 (5,000-4,000).
Mutual Fund with Dividend Option
With dividend option, investors receive profits generated by the fund regularly (quarterly, half-yearly or yearly). Dividends are distributed to its investors only when the scheme makes a profit. In this option, the NAV of the fund decreases by the dividend amount.
For instance, you invest in a mutual fund with INR 20. The NAV of the fund increases to INR 30 and the fund manager decided to offer a dividend of INR 4. Once the dividend is paid, the NAV of the fund declines to INR 26.
How to select the best option suited for me?
During bull (favourable) market periods, opt for dividend mutual fund- in case you want to receive regular cash flow. The likelihood of receiving a profit is high when markets are up. However, you lose out on compounding returns as the dividend will not be reinvested. Also, note that you won't receive a payment if the investments turn sour.
A retired person would benefit from such an investment prospect.
On the other hand, the growth option keeps on reinvesting the profits that the mutual fund makes. Additionally, the returns are compounded, giving you higher proceeds at the time of maturity.
A person with a steady income and long term horizon could opt for the growth option.
Does it have a tax implication?
In the case of dividend option, a dividend distribution tax (DDT) at the rate of 10% will have to be paid by the mutual fund. Investors will not have to pay any tax. However, this tax could reduce the return on equity funds.
If you invest in a growth option, long-term capital gains over INR 1 lakh on equity funds will be taxed at the rate of 10%. For an investment held less than one year, you will be taxed at 15%.
The differentiation between growth and dividend options can be shown in Table 1 below:
1. Offers Higher Returns in the long run
2. Suitable for investors with higher risk tolerance
3. Experts in the field of mutual funds manage these funds
4. Diversified Portfolio
1. High Market Risk
2. Value of stocks depends on the market
3. Does not provide regular income
4. Not suitable for those who wish to receive quick profit in a short time
1. Regular payouts of dividend
2. Suitable for investors looking for reliable and steady income
3. Less risky than other types of funds
4. Dividends are tax-free at the hands of investors
1. Dividends are linked to the profits of the company
2. Funds do not perform well in a bullish market
3. Tax implications associated with this fund
4. Tax impacts the amount of the profit received from this fund