Decoding The Growth & Dividend Options In Mutual Funds

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 ABC fund with an 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 (Also known as 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 amount of dividend.

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 ABC fund has an 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 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 Fund that can be purchased with the Dividend                   11.11  Dividend Receivable/New NAV
 
 
Final number of units                 111.11  Initial + Additional  

Which fund should you be investing into?

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.

In A Nutshell

 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

Disclaimer: NAVs in the article are only indicative and not the exact measures. They are only for representation of the direction of adjustments.

Add comment

Your email address will not be published.