Choosing Growth or Dividend option in Mutual Fund

A mutual fund generally offers two schemes: dividend and growth. The dilemma that most of the Mutual Fund investors face is to choose between Growth or Dividend option.

The dividend option does not re-invest the profits made by the fund though its investments. Instead, it is given to the investor from time to time. Normally, the dividend option is chosen by those who would like to retain their investments in the mutual funds even while expecting periodic returns from it without actually redeeming any investment.

In the growth option, all profits made by the fund are ploughed back into the scheme. This causes the NAV to rise over time. To realise the growth in value or to meet financial needs, investors had to redeem the units. The earning is ploughed back into the scheme itself which is reflected in the NAV and as in the case of cumulative option in bank deposits, witnesses an exponential value growth over a period of time.

Both the options have their own advantages. Both are equally tax-neutral in that with the abolition of long term capital gains tax. For those opting for dividend option, the dividend declared by mutual funds would be tax free at the hands of the unit-holders.

Dividend Income payouts by Mutual Funds

Mutual Fund units are generally confused with equity shares listed on stock exchanges. This is especially true in the case of dividend payouts being made by funds. Most people are not aware that the Net Asset Value (NAV) of the fund reduces by the amount of dividend paid and that any repurchase offered after the dividend payout date is made at the ex-dividend value.

While even share prices are influenced by dividend payouts, demand-supply factors in a stock market can cause the price to move sharply up or down. This demand-supply factor does not impact fund unit value in the case of funds that are not listed on any stock exchange. And, most funds are unlisted open-ended funds.

What does all this mean to you as an investor?

If you decide to invest in funds after seeing advertisements announcing dividend payouts, you will not necessarily add to your wealth. However, it is important to remember that while investing in such funds purely to gain access to dividends may leave your wealth unchanged.

In case of debt or income funds dividend distribution also entails a tax. Even this tax is reduced from your unit’s net asset value.

So, which Mutual Fund option is better Dividend or Growth?

This brings the question as to whether you should opt for growth option or dividend option in a mutual fund. To anwser it you should be clear of your investment objectives. Those who invest from a capital appreciation point of view over long term should choose the growth option, those seeking regular income should pitch for the dividend option. But you should understand that the dividend payment is not assured and if there were no surpluses, there would be no dividend.

Dividend you recieve on your Mutual Fund scheme is not something extra. Your returns from a Dividend Option and Growth option are almost same. Generally, Dividend Payout is somewhat inefficient, as you lose the chance of compounding your returns (assuming that the dividend you receive is not invested but used up; which is the case with many investors)

11 thoughts on “Choosing Growth or Dividend option in Mutual Fund”

    • Dear Tip Guy,

      I agree with the points mentioned in your post. But, they are valid in case of Stocks investment, while in MFs, dividend is a misnomer!

      Further, I would like to know more about your personal bias “against mutual funds”. This is a very interesting point that you have mentioned, there are many investor who don’t like investing in MF, probably you can let us know of some reasons for such a bias!

  1. Hello Shweta

    Thanks for your thoughtful comments. I appreciate your viewpoint.

    Regarding why I am bias: That’s a very good question. Can you identify four or five mutual funds, that you think are good? I can use them as an example for discussion.

    And the reason is, I do not read much or spend time on MFs. Therefore, I cannot reference any good MFs. I may choose some irrelevant ones.

    Best Wishes,

  2. Some thoughts:

    1. Mutual fund now have an additional option called 'Dividend Reinvestment" Through this, they will declare dividend and not sent the same to subscriber as cheque. But, buy units of the same mutual fund. Remember, the NAV calculated as the option with dividend and what a pathetic situation!!!!! your money even not growing like selecting the growth option and not getting the dividend in the hand too. the only usage of selecting this option to add some more units to your fund.

    2. Divident option can select by anyone who required money time to time. this is not intended to small investors but some fund, regular and consistent div payers, is better for those want money time to time.

    Welcome your thoughts too.

    • Agreed! But we had deliberately left out Dividend-Re-investment option as the Dividend will be reinvested at the NAV on the Dividend Payout date, however, if you choose Growth option you get a compounding return on Dividends as well.

      Dividend-re-investment is only marginally better than Dividend-payout option, but as you said it correctly, Dividend option is for people who require money from their investments from time to time. But, Dividend-re-investment defeats this purpose, so why not go for Growth option itself! Please share your comment on this logic.

  3. This is a wrong post. Dividend is not taxable in hands of investor, but fund house pays dividend distribution tax. So dividend vs. growth option does make tax difference depending on whether you hold the fund for less than or more than 1 year (also dependent on whether the fund is classified as Equity or debt)

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