Dividend v/s Growth Option

While making Mutual Fund investment an investor has endless number of choices. The most confusing decision arrives while making selection between Dividend or Growth Option. Each type of fund has its advantages and disadvantages, and deciding which is a better fit will depend on your individual needs and circumstances as an investor.

If investors choose an investment that provides regular income, like a bond or a deposit, they get no appreciation in the value invested. If they choose an investment that has the potential to appreciate, there is no regular income in the form of dividends.   Mutual funds enable the best of both worlds.  They give investors the option to choose dividends or growth.  Investors can buy a debt fund and choose a growth option, thus opting for capital appreciation in a debt portfolio.  Investors can buy an equity funds and choose a dividend option, to get regular income.  Virtually all mutual fund products provide dividend and growth options to investors. The dividend option aims at paying periodic dividends to the investor provided the fund has earned returns. The dividend payment may be either ad‐hoc or at regular intervals like quarterly, half‐yearly or annual. The growth option provides long‐term capital appreciation to the investor which can be realized at any time the investor chooses.

If investors need growth they can choose the growth option.   If they need income, but do not want the dividend to be subject to distribution tax, they can choose a growth option, and realize their gains periodically to generate income.   If they don’t need income, but will suffer a high tax on short term capital gains if they choose growth, they can choose the dividend option, and instead of a payout, reinvest the dividend in the same fund.  In this way investors who need income can also choose the growth option, and investors who need growth can also choose the dividend option. That is the flexibility that a mutual fund can offer to investors to manage their need for income and for saving taxes efficiently.

Recommended Posts