You often must have heard of Dividend and Growth option of Mutual funds and found yourself wondering as to which option to opt for. You may have noticed a single mutual fund scheme having the growth option and dividend option. Their NAVs are different and in most cases NAVs of dividend options are much lower than the growth option.
Well, let us try to understand the difference between the two.
What is GROWTH option?
In the growth option, the profits earned by the mutual fund scheme are re-invested in the value of Mutual Fund, thus causing a rise in the NAV of the mutual fund. Here, the re-invested profit too, earns profit. The profit by the mutual fund scheme is earned through the stocks in which the mutual funds have invested. As the underlying stocks gain profits, the NAV of the Mutual Fund rises. If the underlying stock makes a loss, the NAV of the Mutual Fund falls down.
The only way you earn profit in a mutual fund growth option is when you sell the units and claim the benefit.
What is DIVIDEND option?
Under Dividend option of Mutual Funds, the profit earned by the fund house is distributed to the investor from time to time. It may appear that there is regular inflow of cash to the investor through dividend option, however it should be noted that payout is done by the fund house as and when the Mutual fund house earns profit and declares dividend out of its profit.
Which option is more beneficial?
Which option is more beneficial entirely depends on the needs of the investor.
Some may want to have a regular flow of income and thus may choose the Dividend plan, while some may want to opt for wealth creation from their investment, and thus choose to invest their Interest too.
However, here is point of caution. It may appear that the dividend option is giving regular income, however, in the dividend option we are eroding our wealth from the magic of compounding! Also, the dividend declaration is entirely at the mercy of the profitability of Fund House, on other hand, the growth option lets you earn interest on interest, thus leading to better wealth creation in the long term.
Let us study the table mentioned below to see the difference in Growth option and Dividend option:
|BIRLA SUN LIFE BALANCED FUND|
|Year of Investment||1995|
|Amount Invested||Rs. 10,000|
|Year of Sale||2017|
Let us see the value at the time of sale-
|PARTICULARS||DIVIDEND OPTION||GROWTH OPTION|
|VALUE OF INVESTMENT IN 2017|
|Value of Capital:||Rs. 1,55,000||Rs. 7,50,000|
|Dividend declared:||Rs. 1,27,000||–|
|Total||Rs. 2,82,000||Rs. 7,50,000|
Analysis of the table:
Here, in the above table we can see a difference of Rs. 4,68,000 in the net value realized. This is because the sum of Rs. 1,27,000 which was declared as dividend, was re-invested under the growth option and earned Interest on the same whereas in the dividend option they were utilized otherwise.
Let us look at one more point of differentiation between the two options i.e. Taxation.
Tax is levied on Dividend from Equity Mutual Fund post the introduction of Capital Gain Tax on Equity Investment @10%, on the dividend declared.
Similarly, for dividend declared on Debt Funds, the mutual fund houses have to pay a tax of 28.84% before distributing the dividend, thus resulting in lower gains in the hands of the investor.
However, under the growth option, there is no scope of such taxation. Taxes are levied on the profits as and when the units are sold, and that too based on the Equity or Debt component of the Mutual Fund.
Looking at the points mentioned above, it is feasible to opt for Growth Plan of Mutual Fund for better returns and wealth creation.
If an investor wishes to have a regular flow of income, they can opt for Systematic Withdrawal Plan so as to have timely returns of fixed value.
We have discussed about the Systematic Withdrawal Plan in one of previous articles. The link for the same is https://richvikwealth.in/knowledge-byte-benefits-of-investing-in-swp/
To know more on Investment in Growth and Dividend Options of Mutual Funds and personalized planning of your investments, feel free to contact us.