Investing in mutual funds allows investors to direct their savings to opportunities that match their risk profile and financial goals. Mutual funds typically offer two options for investing: dividend and growth.
Dividend vs growth
Investing in mutual funds allows investors to direct their savings to opportunities that match their risk profile and financial goals. Mutual funds typically offer two options for investing: dividend and growth.Growth option
In this case, the gains made by the mutual fund are reinvested in the scheme, which increases its net asset value (NAV). Investors don’t get payouts, but benefit from capital appreciation.
In this case, the fund periodically distributes profits to investors in the form of dividends. These are made at various intervals. After each dividend payout, the NAV of the scheme decreases as profits are paid to investors instead of being reinvested.
When to choose growth
This option is good when:
- The investor is aiming for long-term wealth accumulation.
- The focus for investment is capital appreciation, not providing for regular income.
This option is usually aimed at investing for a longer horizon, such as retirement or long-term goals like children’s education.
When to choose dividend
This is good when:
- The investor is looking for regular income. For instance, a retired investor can use his retirement corpus to generate monthly earnings with this option.
- The investor wants to realise profits from his investments without selling the units.
Points to note
- Dividends are not guaranteed and depend on the fund¡¦s performance.
- In case of the growth option, capital gains are taxed only when the investment is redeemed. However, dividends are taxable in the hands of the investor as per their income-tax slab.
Content courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.