Dividend Plan vs Growth Plan
While choosing a Mutual Fund, an investor requires to make a range of choices. Among the more confusing decisions is the choice between a fund with a growth option and a fund with a dividend option. Each type of fund has its advantages & disadvantages and deciding which is a better fit will depend on your individual needs and circumstances as an investor. The growth option on a mutual fund means that an investor in the fund will not receive any dividends that may be paid out by the stocks in the mutual fund. Some shares pay regular dividends, but by selecting a growth option, the mutual fund holder is allowing the fund company to reinvest the money it would otherwise pay out to the investor in the form of a dividend. This money increases the net asset value (NAV) of the mutual fund. The profits made by the scheme are not paid by way of dividend. Instead, these get accumulated and form part of the scheme via reinvestment. So, whenever the scheme makes a profit, its NAV rises automatically. Conversely, when the scheme suffers a loss, the NAV falls. The only way to get back profits is to sell units of the scheme. In case of a dividend option, profits made by the scheme are not re-invested in the scheme. Instead, gains will be distributed among the investors by way of dividends; on a quarterly, half-yearly or annual basis. However, the fund doesn’t guarantee as regards the amount and frequency of dividend payment. Usually, the fund manager declares the dividend only when the scheme generates profits. Which option is more beneficial? Your returns from both options are almost the same. But in the dividend payout you lose, on compounding returns as the dividend you receive is not re-invested either by the scheme or the investor. Unlike the dividend option, the growth option reinvests the gains over and over again and the returns are compounded, resulting in higher proceed, at the time of maturity. The dividend option works best when valuations of the market seem high. When markets are at a high, the likelihood of the fund house declaring a dividend is higher, as making profits on investments becomes easier. In case you need some funds, the dividend option will work for you. This is because the periodic distribution of dividend is like booking profits. Start an instant chat, to get into a discussion on Financial Planning. You can start your own planning at : www.infirupee.in/login.html |
Disclaimer : Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing. |
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