Is there any difference between dividend and growth mutual funds? is a dilemma for every beginner investor. People invest in mutual funds to have an extra regular income or to increase their wealth over time. To aid both situations, mutual funds are divided into two options – dividend mutual fund and growth mutual fund.
A dividend plan is further categorized into two options – reinvestment and payout – which will be discussed further in the article. You must learn all the advantages and disadvantages of both plans before investing. Your investment plan should cater to you, be it a short-term or a long-term goal.
After reading this article, you will know about the difference between dividend and growth mutual funds and would be able to make a more accurate decision.
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What is a growth mutual fund plan?
If you invest in a growth mutual fund plan, the profit generated at the end of the year will not be credited to you in cash form. Rather, it will be reinvested in the mutual funds by the company on your behalf. This reinvestment will ultimately affect the NAV (Net Asset Value) of the mutual funds you held. If the scheme is in profit, the NAV will increase. However, if the scheme is suffering from a loss, the NAV will decrease.
The only time when you will receive the profit in cash form is upon redeeming or selling your mutual funds.
What is a dividend mutual fund plan?
If you invest in a dividend mutual fund plan, you will receive the profit in the form of dividends. But you have to choose the dividend option because the dividend plan gives two choices i.e., reinvestment or payout. In dividend reinvestment, the unit of shares you held will increase whereas, in dividend payout, you will receive the profit in cheque or direct transfer in bank account.
In this plan too the NAV (Net Asset Value) will increase but not the same as the growth plan. Because the profit is periodically distributed, the payout declared is deducted from the NAV at the year’s end.
However, the dividend is given out only when the scheme is resulting in profit and at the discretion of the fund manager. At the time of loss, no dividend is paid out.
Know the difference between dividend and growth mutual funds
Choosing the investment option that is appropriate for you needs coverage from all aspects. There is a number of things that affect both plans differently. Upon learning the differences between dividend and growth mutual funds your investment decision will surely be affected. For a better understanding of them, you need to follow the below carefully.
|Basis||Growth Plan||Dividend Plan|
|Horizon||In this plan, the horizon is for a long time because the cash is given out only when the investment is sold off. If the investor does not sell the mutual funds, their wealth will keep on increasing.||In this plan, the dividend is paid out regularly. To receive the cash, investors need not wait till they sold off the mutual funds. Hence, the horizon is short time here.|
|Cash inflow||The cash is not paid out to the investor unless they redeem or sell off their mutual funds. Instead, the profit is reinvested.||The cash flow in the dividend plan is periodic. The profits are paid out at regular intervals in the form of a dividend.|
|Taxation||If the funds are held for less than a year, a 15% tax is imposed on the mutual funds. Whereas, if the funds are held for more than a year (for profit above Rs 1 lakh), a 10% tax is payable.||The investor is required to pay 10% DDT (dividend distribution tax) on the dividend received. Other than DDT, TDS is 10% on dividend income paid in excess of Rs 5,000 from the mutual funds.|
|Risk||In the growth plan, there is a slight risk involved. The profit is not given rather it is reinvested. So, if at the time of redemption or selling of mutual funds, the scheme will be in loss then the money given will be low.||The risk involved in the dividend plan is comparatively less than the growth plan because the dividend is regularly paid out to the investors.|
|NAV (Net Asset Value)||The NAV of the funds that the investor holds will gradually increase and will be higher than the other plans. The profit is reinvested which results in an increased NAV.||The NAV of the funds in a dividend plan will always be a little less than the growth plan. When the dividend is received, the payout declared is deducted from the NAV.|
|Compounding||The profit generated is reinvested in the funds. Over time, the value of the investment is increased and the profit is a result of the compounding.||The profit generated is withdrawn periodically as an income. Because there is no reinvest in the funds, the investor losses the benefit of compound profit.|
|Returns on investment||The returns on investment will be high in the growth plan because of the reinvestment and compounding. But on the other hand, the investor can also suffer losses if the scheme is under huge depreciation.||Not in a lump sum but you are receiving the returns regularly. The income is not fixed as it keeps on changing according to the profit generated but is still better than the growth plan where the investor can suffer complete loss.|
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Which option should you choose?
While deciding the investment option, you should consider factors like the time involved, risk ratio, and returns. If you want to increase your wealth over time and receive more returns, a growth plan is good to go. However, for people looking for continuous income, a dividend plan is for you. You need to examine the different aspects of dividend and growth mutual funds to achieve your goal. You need to choose between present and future money.
No mutual funds plan is all perfect but you need to mold it in a way that will benefit you. Now that you have a clear view and know the difference between dividend and growth mutual funds, choose your investment option wisely. Remember, there is no single rule for everyone. You must choose the plan that will be the most beneficial to you and your goals.