Which Is the Best Option for Mutual Fund Investment- Growth or Dividend Plans?
To experience the true value of one’s money, it’s important to understand the implication of the choices made. Selecting the right option when investing in mutual funds from Dividend and Growth is as important as selecting the right scheme.
Today, in this blog, you’ll get a detailed description of both these options. Our motive is to help you understand the benefit of both the available choices so that you can make the right decision for yourself. So, let’s get started!
What Are Growth and Dividend Plans?
The Growth plans are the ones where investors do not receive any dividends, and by selecting this plan, he/she is allowing the fund manager to reinvest the profits earned which would otherwise be paid out in the form of dividends. The additional money increases the Net Asset Value of the fund. This option is ideal for investors who want to maximize their fund’s NAV, and upon sale, realize a much higher capital gain on the same numbers of units which were purchased originally.
Coming to the dividend option, in this scenario, the dividend distributions are paid out directly to the unitholders. These dividends are usually swept instantly into a cash account and are transferred electronically into a bank account or sent out by cheque. Choosing to reinvest dividends or having them paid out do not affect the tax implications. From a tax perspective, dividend distributions are treated identically in either situation. Such investments are ideal for investors who are at their retirement age, and require regular income in the form of a dividend to fulfill necessary expenses.
Other Available Option:
Mutual Funds with Dividend Reinvestment Option
This option or investment strategy is different from others. In this case, the dividends that would otherwise be paid out to the respective investors are used to purchase more units in the fund. The fund's administrators used the amount to buy more units on behalf of the investors and transfer them to individual investors' accounts. This way, there is an increase in the number of shares owned over time, and this typically results in the growth value at a faster rate than if dividends were not reinvested.
How Can Your Investment Objective Help You Pick the Right Plan?
On considering your investment moto, it becomes easier to zeroin the right investment plan. If you are looking for a regular income source, then go for a dividend option. Or in case your investment objective is to create wealth over a long period, you should invest in the growth option.
What Should You Choose?
As discussed above, you should take your investment objective into account to decide on the investment strategy. Another important aspect of analyzing is the applicable tax percentage.
- Long-Term Tenure:
In case of equity mutual funds, growth option is the best bet. This way, an investor can take the full advantage of compounding and make it work in their favor. When you opt for regular dividends, it’s possible that you spend the amount on things that you don’t require. A much bigger corpus can only be generated if you let it compound for a long-term period.
- Short-Term Tenure: >1 year
If you wish to invest for a short-term tenure, debt mutual funds will be more suitable. For a short-term investment in debt funds, it is more recommended to opt for a dividend or dividend re-investment option.
The Bottom Line
As of now, you must have understood that both the available strategies have their own benefits. As not every approach works correctly for each investor, that’s why one can choose as per one’s objective. To reach to a reliable conclusion, it’s advised to examine the attributes of the selected scheme to avoid investing in a fund that doesn’t serve your unique need; whether it is growth or payout.
You also have an option to connect with the experts of MySIPonline to overcome this dilemma, as here we provide the best of services and suggestions regarding mutual fund investment.
- This Independence Day, Let's Pledge for Freedom from Financial Worries2166 min read Aug 14, 2018
- Are Balanced Funds Better Than Balanced Advantage Funds?2984 min read Aug 02, 2018
- 7 Points to Ponder While Investing in Small Cap Funds8063 min read Jul 19, 2018