Choosing the Right Option: Growth vs. Dividend Pay-out Mutual Funds
When investing in mutual funds, one of the key decisions that investors need to make is whether to opt for the growth or dividend option. These options represent different ways in which the returns generated by a mutual fund are distributed to investors.
What is the Growth Option?
The growth option is a type of mutual fund option in which the returns generated by the fund are reinvested in the fund. This means that any dividends or interest income generated from the underlying investments are not distributed to investors, but instead are used to enhance underlying investments in the scheme of the fund. As a result, the value of the investor's investment grows over time, as the value of the fund's underlying securities increases.
What is the Dividend Option?
The dividend option is a type of mutual fund option in which the returns generated by the fund are distributed to investors in the form of dividends. Dividends are typically paid out at regular intervals, such as quarterly or annually, and are based on the fund's net income from interest and dividends received from the securities it holds. The dividend pay-out reduces the value of the investor's investment in the fund.
How do the Growth and Dividend Options Differ?
The main difference between the growth and dividend options is how the returns generated by the fund are distributed to investors. With the growth option, the returns are reinvested in the fund, whereas with the dividend option, the returns are distributed to investors in the form of dividends.
The growth option is typically favoured by investors who are looking for long-term capital appreciation since this can result in higher returns over the long term, as the investor benefits from compounding returns.Growth plan is indicated by G.
The dividend option is typically favoured by investors who are looking for regular income from their investments. By receiving regular dividend pay-outs, the investor can supplement their income and meet their short-term cash flow needs. Dividend pay-out funds can be especially attractive to retirees or investors who are looking for a steady source of income.Dividend pay-out plan is indicated by IDCW.
To illustrate the difference between the growth and dividend options, let's consider an example. Suppose that an investor invests Rs. 10,000 in a mutual fund with a NAV of Rs. 100. The fund has two options - growth and dividend - and the investor chooses the growth option. Over the course of a year, the NAV of the fund increases by 10%, to Rs. 110. As a result, the value of the investor's investment in the fund has also increased by 10%, to Rs. 11,000.
Now, let's suppose that the same investor had chosen the dividend option instead. If the fund had distributed a dividend of 5% over the year, the investor would have received a dividend pay-out of Rs. 500 (5% of Rs. 10,000). However, this dividend pay-out would have reduced the value of the investor's investment in the fund to Rs. 10,500, as the NAV of the fund would have decreased by the same amount.