October 17, 2009
Choosing Between Growth and Dividend Option
You have done your research and selected the mutual fund you will be buying. You will now have to apply your mind for the choosing the options available for the fund of your choice.
Nearly all mutual funds provide you with two main options. One is the dividend option and the other is the growth option. Within these two, some mutual funds may also offer some variations as well.
The growth option is exactly what it means: your investment grows with time. Unfortunately, some time there may be instances that there may be a loss. This is reflected in the net asset value of the fund. Net asset value is the sum of the total assets held under a fund less accrued expenses divided by the number of units or shares as on a particular date. NAV is the value at which you can redeem your investment less exit load, if any.
Under the dividend option, the mutual fund will pay you a dividend that it may declare out of the profits that it earns. Under the dividend options you may have the choice of getting a dividend on monthly, quarterly or yearly basis.
There may also be a dividend reinvest option, which means that the dividend is not paid but reinvested and added to your initial investment. This is almost similar to the growth option. The difference is that under this option the reinvesting is done on monthly, quarterly or yearly basis instead of automatic growth in the value of your investment. As on a specific date, the value of the amount invested in growth option may be slightly higher than the same amount invested under dividend reinvest option.
The net result is that if a cash payout is made the growth potential of the investment is reduced to the extent of dividend received by you.
If you feel that you do not need a regular income from your investment then the growth option is best suited. The dividend reinvest option is a bit dicey and depends entirely on luck. There is a remote possibility that the reinvestment may be done on a date when the NAV is low.
On the other hand, if you need a regular income from your investment you can opt for the dividend option and get paid on regular basis. There may be instances when the fund does not earn adequate profits in a specified period and you may not get paid for that period. However, most debt funds or funds investing in bonds or money market instruments are pretty regular in dividend payouts.
You may also choose to exercise the dividend option in case you do not need a cash payout but want to be in a position to accumulate your earnings for investing in a new fund to diversify your portfolio. The dividend option may also be a better choice if it gives a tax advantage.
Basically, there is not a big difference between the overall returns and the choice between the two options depends largely on your need and target.