When you are looking to invest in mutual funds, there is another detail that you need to consider. There are two options that are given to you by the mutual fund – The growth option and the dividend option.
Consider an ABC fund that invests in Large-cap funds. When the fund earns profits (when funds’ holdings i.e., the stocks or bonds it has invested into have price appreciation, when those stocks distribute dividends, or when the selling of stocks or bonds provides returns) in the process, it can either distribute it to its investors or it can invest back these gains into the fund.
The growth option
In this option, the profits are added back to the investment corpus of the fund (the number of units held remains constant).
NAV = Funds Assets – Funds Liabilities / Total Number of Shares
The NAV of the fund increases, as the fund’s assets, increase with accumulated profits.
For example: Consider the ABC fund with a NAV of Rs 100. After a year, if the fund has achieved a profit of 20 per share and if it has not distributed it to its investors, the NAV would be Rs 120.
If you had 10 shares of this fund, on selling it after one year you would receive 120*10= Rs 1200. Your cost price was 100*10= Rs 1000. Hence, your gains would be 1200 – 1000 = Rs 200.
The dividend option (Dividend payout option)
In this option, the fund’s profits are not accumulated or reinvested into the fund. They are distributed to the investors.
The gains are distributed either annually or quarterly, and only when the fund makes profits. The fund manager decides the frequency and the number of dividends.
Once the dividend is paid out, the NAV of the fund decreases (it always does not decrease by the exact dividend amount as there are other factors that impact the NAV). The number of units held remains constant.
For example: If the ABC fund has a NAV of Rs 30. If as an investor, you own 1000 shares of the same – if the fund declares a dividend of Rs 3, you would receive 3*1000 = Rs 3000 as a payout. The NAV of the fund would also decrease to NAV – Dividend. Rs 30 – 3 = Rs 27.
Dividend reinvestment
In this option, the dividends are declared, but the investors do not receive a cash payout. They are paid in “kind” or with the shares of the fund itself. Hence, as an investor, you would have more shares of the fund.
For Example
| Dividend Reinvestment | Remarks | |
| NAV of fund | 20 | Initial Stage |
| Number of units held | 100 | |
| Dividend Declared | 2 | As declared by the Fund manager |
| NAV after dividend Declaration | 18 | For the fund |
| Dividend Receivable (not paid out) | 200 | Investor’s Entitlement |
| Additional Units of Funds that can be purchased with the Dividend | 11.11 | Dividend Receivable/New NAV |
| The final number of units | 111.11 | Initial + Additional |
Which fund should you be investing in?
There is no one-size-fits-all rule that we can follow. It depends on the investor and his or her requirements. If you would like to receive payments from the fund to fund your expenses, opting for a dividend payout plan would be ideal for you.
However, if you are a long-term investor who wants to lock in the funds, and wait to reap the returns, you can opt for the Growth option where the profits are accumulated.
In the long run, the Growth option provides a higher return than the dividend option and could be a faster way for wealth accumulation.
You can find all the mutual fund options mentioned above on EduFund, a secure platform to invest in the biggest mutual funds in the country.
| Things to Look for | Growth Option | Dividend Payout | Dividend Reinvestment |
| Dividend Declaration | No | Yes | Yes |
| Impact on NAV | Increases | Decreases | Decreases |
| Dividend in your hands (Bank account) | No | Yes | No |
| Units held | No change | No change | Increases |
FAQs
Which is better dividend or growth fund?
Dividend option for mutual fund is good for investors looking for liquidity. While growth fund is for those who are focused primarily on growth and wish to stay invested for a while.
Which option is good growth or IDCW in mutual fund?
IDCW is a good option for investors looking for liquidity and growth is a good option for investors looking for wealth generation.
How much MF dividend is tax free?
If the dividend amount generated from mutual funds is less than Rs. 10 lakh, then investors do not have to pay taxes. If the amount exceeds this limit, the investor has to pay 10% of the total earnings as tax during a particular year.
What is disadvantage of growth fund?
The biggest disadvantage of growth fund is that they are highly volatile and may fall dramatically.
Consult an expert advisor to get the right plan
Disclaimer
NAVs in the article are only indicative and not exact measures. They are only for representation of the direction of adjustments.
