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GROWTH option vs DIVIDEND option
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In Mutual Funds, there are two types of options - GROWTH and DIVIDED.
Contents
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, profits etc will in turn be invested and the cycle keeps on going.
Does that mean that when the scheme gets dividend for 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 moment (grows).
DIVIDEND Option
However, 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, the fund manager announces a DIVIDEND.
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 you by way a fund transfer to your bank account.
In DIVIDEND - REINVESTMENT, the dividend amount is used to purchase units of the scheme
In some schemes, such as 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. The scheme is indirectly our money. So, we are basically paying a tax on dividend indirectly.
We should prefer Dividend option when we need periodic returns or if we wish need some sort of regular income from the mf scheme.
If you are a young investor who wish to invest for really longer time frames such as 10+ years, 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 mananing 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 explicity 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