GROWTH option vs DIVIDEND option

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

It is often confusing as to what an investor should opt.

This session explores both the options and tells you which is good 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 in turn 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.

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.

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

Hence, for most investors who invest for long term goals, 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.

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 DIVIDENDS month after month (though the fund manager strives for it, if the scheme mandates so).

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.

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 in debt portion of the scheme.

The scheme money is indirectly our money.

So, we are basically paying a tax on dividend albeit indirectly.

We should prefer Dividend option when we need periodic returns 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.

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

• Net Asset Value or NAV
• Know Your Customer / KYC
• Expense Ratio
• Systematic Investment Plan and Compounding effect
• SIP vs Lumpsum Investments
• GROWTH option vs DIVIDEND option

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