Once you have made your selection from among the many Mutual Funds on offer, you then have to make a choice between the growth and dividend options. The growth option is a cumulative option, the profits of which keep accumulating in the scheme. The Net Asset Value (NAV) of such schemes appreciates in parallel. On the other hand, the dividend option entails the payout of such profits periodically. The NAV of a dividend scheme typically declines when a dividend is declared.
The primary factor that will help you zero in on one option over the other is your liquidity needs. If you are looking to obtain a regular income from your investments, picking the dividend option might be the way to go. This is especially effective in the case of debt funds, which tend to be more stable and predictable. Equity, on the other hand, tends to be a volatile asset class and you should tread with caution while picking the dividend option in an equity scheme, especially if your expectation is to obtain payouts from time to time.
Tax Saving Aspects
Investors need not pay any tax on dividends obtained from Mutual Funds. However, in the case of debt funds – the fund house will deduct a Dividend Distribution Tax (DDT) of 28.84% on the dividend(s) declared. This needs to be taken into account while making your choice between the two options. Keep in mind that long-term capital gains from equity funds attract no tax in any case, with ‘long-term’ defined as a holding tenure of over a year.
Then there is the dividend reinvestment option that may suit certain investors. It is largely similar to the growth option, except when dividends are declared. On such occasions, new units of the scheme are purchased at the prevailing NAV and added to the folio. This, in turn, increases the number of units held for the same cost price.
The growth option is a good fit for investors working toward long-term wealth creation. While the dividend option does offer the prospect of period payouts, unless these dividends match the fund’s overall rate of return if and when reinvested, the growth option will always be the greater wealth creator in the long run.