Mutual fund houses offer two kinds of schemes: Growth and dividend. In the growth option, profits made by the scheme are invested back into it. This results in the net asset value (NAV) of the scheme rising over time. When the scheme gains, the NAV rises and in case of a loss, it goes down. The only option to realise the profit in the growth option is to sell or redeem your investments. The dividend option does not re-invest the profits made by the fund. Profits or dividends are distributed to the investor from time to time. The amount and frequency of dividends is never guaranteed. Dividends are declared only when the scheme makes a profit and it is at the discretion of the fund manager. The dividend is paid from the NAV of the unit.
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.
Who should go for what?
Those who want to create wealth or have a goal to fulfil over a longer period of time should choose the growth option. Typically, those with regular income flow are advised to invest in the growth option. Those looking for a regular income such as retirees, should pitch for the dividend option.
How are they taxed?
There is no long-term capital gains tax on equity-oriented mutual fund schemes. The short-term capital gains tax is 15 per cent. If you stay invested in a growth scheme for more than a year, your investment will be tax-free. For those opting for a dividend option, the dividend declared by mutual funds would be tax-free at the hands of the unit holders. Dividend distribution tax is paid by the fund house at 14 per cent.
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