Mutual Funds, one of the most important investment vehicle in the stock market, refers to a collection of funds, collected from several investors, with an intention of investing in profitable securities like money market instruments, stocks, bonds and other assets. Its portfolio is structured and simulated in such a manner that matches the investment objectives stated in its prospectus. One of the main advantages of a mutual fund is that it gives even small-scale investors an opportunity to invest in professionally managed portfolios, which would be an otherwise difficult option due to the small amount of invested capital. Mutual funds charge all shareholders proportionally, in accordance with the gain or loss of the fund. They can be redeemed or purchased as required, according to the Net Asset Value per share of the fund.
One of the most difficult tasks faced by investors is making a choice between the hundreds of mutual fund schemes available in the market. Subject to market risks, one also cannot ignore the dilemma of making a choice between the growth and dividends of mutual funds. The scare of losing out on your investments and opting for debts like loans, personal loan etc., to finance one’s requirements always persists. Since, these debts lead to hindrances in the financial growth due to pre payment penalties, interest charged, EMIs, etc., it is the road best not taken. While both alternatives do not assure tremendous profits or losses, it is important to make a prudent choice between growth, dividend reinvestment and dividend payout, so as to assure better returns.
If you settle for the option of dividend payouts, profits made by investors under the mutual fund are paid back at regular periods of time, without being reinvested in the fund. However, it is important to note that dividends with such a choice aren’t guaranteed. Also, based on the discretion of the mutual fund, the dividend may be distributed to you throughout the course of one year, dishing nothing out for the next year. Also, the amount of dividend paid may vary. Investors must also know that the dividend received out of a mutual fund is actually deducted out of the Net Asset Value of the mutual fund.
If investors select the growth option, profits made under the mutual fund scheme are reinvested back into it, without any payouts for the investor. This gain is reflected on the Net Asset Value of the mutual fund scheme, which increases over a period of time. Thus, the difference between the options of dividends and growth is that while dividends help investors make money not only through the dividends, but also through an appreciation in the Net Asset Value of the mutual fund scheme. On the other hand, through growth, investors can earn money by selling the scheme at a later period of time, at a much higher Net Asset Value of the scheme.
If you decide to choose the reinvestment option, your dividends from the fund are automatically reinvested into the scheme. Thus, you buy additional units in the same scheme from the dividend amount, at the prevailing Net Asset Value of the mutual fund scheme. Like dividend payouts, the Net Asset Value of the scheme will fall, following the payment of dividends, even if reinvested in the scheme. Thus, the Net Asset Value of both the choices remains the same. However, there may be a difference in the tax incidence of both the cases. There may also be a difference in tax implications on the basis of the choice of the fund, nature of income and the holding period of the fund.