What are the Dividend Options and Growth Options under Mutual Fund?

Narendra Kumar

30 May, 2019

Mutual fund (MF) is one kind of financial scheme where the smallest of small investor can invest his fund in order to invest in stock exchange market and earn profit from stock exchange. Here the investor has to select a fund suitable to his needs and keep investing in it as per net asset value(NAV) of the units. Further, as and when the NAV of that unit appreciates he can sell the units (take exit) and earned the profit of such investment. Value of NAV is of course subject to market fluctuations. There are different types of growth options under Mutual Fund, popularly known as equity, debt, hybrid, etc. Some Mutual funds are also used as tax saving instruments and it is affected via dividend declared on the schemes invested.

The investor investing his fund in mutual fund has generally two options like the security of fund along with consistent return in the form of dividend or to earn super profit in the form of appreciation of investment by choosing to take some extra risk. However, to select between these two options is not that easy and can be confusing also and it will depend on individual needs, investible fund and circumstances.

The Difference between Dividend Options and Growth Options under Mutual Fund:

In case of dividend option of a mutual fund scheme, whatever the profit earned by the fund is distributed to the unit holders from time to time. This option should be chosen If there is possibility of periodic income from investment without actually redeeming any of the units held by investor.

As an investor, one must understand that the Net Asset Value (NAV) of the fund always reduces by the dividend amount paid on that scheme and that any repurchase after the dividend pay-out date is made at the ex-dividend NAV

In case of the growth option under mutual fund scheme, all the profits earned by the fund are reinvested into the scheme. Hence, the NAV of this scheme increases over a time compounding the principal amount invested. It is similar to the cumulative fixed deposit scheme of the bank where the growth is exponential over a period of time. As an investor, one has to redeem the units of the scheme to realise the growth benefit of his investment.

Growth Vs. Dividend Options

The selection between these 2 options should be considered taking into account the cash flow requirements of investor. In other words, if one does not have any periodic liquidity needs as such then the growth option under mutual fund of the scheme will be ideal for the investment. The return in the growth option will be reflected in the value of the NAV of the scheme as NAV will rise by reinvesting of profit earned under this scheme. Under such schemes, recently the consistent investors have earned fabulously over a period of 10 to 12 years. Such schemes have performed so well in recent times. Such schemes keep on investing in those shares which have very bright future and good potentials for future returns. Over a period of time such investments give very good returns in terms of high dividend, rights, bonus and thus appreciation of share price.

On the other hand, if one needs regular cash flow from his investment then dividend option will be ideal for him as he will receive regular dividend income from such investments. Such funds exclusively concentrate on timely earning like dividend from the investment.   As far as income tax is concerned, such dividend is tax free but AMC deduct a dividend distribution tax and deposit to government treasury.

In terms of the current income tax laws, the burden of income tax on growth option fund depends on the holding period of such fund. The returns from Growth Options under Mutual Fund units for a period of less than a year attract short-term capital gain tax and returns from units held for more than a year attract long-term capital gains tax as per the current income tax laws.

Both options are offering their unique advantages and benefits to its investors. There are many AMCs offering various schemes of investments and many of them have performed far excellent and investors are benefitted beyond their imaginations over a period of time. They have schemes for fixed dividend income as well as for growth/appreciation for the investors.

As always, the advice of a financial advisor may be sought to identify an option most suitable to one’s financial needs, risk appetite and tax status.