This website is purely ACADEMIC in nature and NOT a stock market recommendation service or a tip provider. No live data or feeds are provided and all information is historic only. Information is provided for ease of understanding for the purpose of learning. Accuracy of definitions etc is not mantained. I am not a SEBI or IRDA registered.

GROWTH option vs DIVIDEND option

From Asuku.com
Jump to:navigation, search
HomePersonal FinanceMutual FundsEquity

In Mutual Funds, every scheme comes with two options - GROWTH and DIVIDED.

Most novice investors have the problem of selecting the right option amongst these two.

This session explores both the options and will help you selecting the option that is right for you.

GROWTH option

In GROWTH option, the fund manager, when booking profit in the underlying assets, will retain the returns and add them to the corpus of the fund.

So, the dividends that the scheme gets for having invested in equity shares, the interest that the scheme gets for having invested in debt securities, the capital gains and profits will all be added to the scheme corpus.

This money will be invested in subsequent opportunities that the fund manager sees.

In this manner, compounding of money takes place and over a long period of time, the GROWTH option delivers good exponential type of returns.

Remember that Compounding is considered the Eight Wonder and a powerful tool to make wealth for the long term investor.

Does that mean that when the scheme gets dividend from an investing in the underlying shares, the dividend amount is added to the scheme?

Yes. Indeed.

It is the investors who are the owners of the underlying securities of a mutual fund scheme.

So the Dividend earnings of the scheme will be added back to the scheme corpus.

Also, because the corpus or the net assets of the scheme increases because of the dividend money being added, and since this is happening without any increase in units, the NAV will see a minor upward increment (ie NAV goes up).

Hence, for most investors who invest for long term goals and not looking for intermediate benefits (in the form of Dividends), the GROWTH option is best.

DIVIDEND Option

In DIVIDEND option, when the fund manager sees little investment opportunities going forward, or when the scheme mandates that it needs to share profits periodically back to the investor, the fund manager announces a DIVIDEND.

DIVIDENDs are given at the discretion of the fund manager.

Remember, DIVIDENDS can be shared to investors only if there is a surplus (profit) made by the scheme.

There is no guarantee that the scheme needs to give DIVIDEND (periodically, say month after month) (though the fund manager strives for it, if the scheme mandates so).

Further, a REGULAR plan scheme giving dividend is different from a DIRECT plan giving dividend.

Just because REGULAR plan announced a dividend does not mean the DIRECT plan will give the dividend also.

DIVIDEND Sub-options

Under DIVIDEND option, there will be two sub-options:

DIVIDEND - PAYOUT

DIVIDEND - REINVESTMENT

In DIVIDEND - PAYOUT, the dividend announced will be given to the investor by way a fund transfer to his bank account.

In DIVIDEND - REINVESTMENT, the dividend amount is used to purchase units of the scheme.

In some schemes, such as the Monthly Income Plan or MIP Schemes, there will be sub-sub-options like: FORTNIGHTLY, MONTHLY, QUARTERLY etc.

Basically, they denote how frequently the dividend is to be shared with investors.

Default option

When an investor forgets or ignores selecting the option when filling the mutual fund application form, it is deemed to be GROWTH option.

If however, the investor selected the DIVIDEND option but has not selected the sub-option, the default option is the DIVIDEND PAYOUT option.

Which one is best: GROWTH or DIVIDEND?

Dividends are tax free in the hands of investors.

However, there will be a Dividend Distribution Tax (DDT) incurred on the scheme.

The DDT is paid by the AMC on behalf of the investor.

So, it is indirectly the investor money.

This means that we are basically paying a tax on dividend albeit indirectly.

We should prefer Dividend option when we need returns (perhaps periodically) or if we wish to get some sort of regular income from the mf scheme.

This is an essential option for investors who retired from their active employment / work life and want to use live based on dividends of their investments.

If you are a young investor who wish to invest for really longer time frames and do not have any dependency on investment dividends for your living, then the GROWTH option is a better one.

Sometimes, Dividend payouts are selected by investors who are in high tax brackets.

When a Dividend Payout happens, the NAV of the scheme comes down.

So, the value of the investment comes down as well.

This reduces the Capital gains tax outgo as well.

Transparency about dividends earned by Mutual Fund schemes

We know that mutual fund schemes invest money in company equity shares and other such instruments.

And companies often announce dividends.

This dividend money belongs to the scheme and hence it is being added to the scheme corpus.

How much dividend money did the mutual fund scheme in which I invested earned?

Is there any disclosure or transparency about this?

The answer to this is yes. but to a certain extent.

Mutual fund managing Asset Managing Companies periodically disclosure balance sheet, profit and loss and other such statements periodically, often every quarter, half-yearly or annually.

These statements shows scheme-wise as to which scheme has earned how much money from which mode.

Though this is not explicitly intimated to investors at all times, such disclosures are posted on the mutual fund websites.

Related Topics

HomePersonal FinanceMutual FundsEquity
}}