Growth Funds

Growth Option or Dividend Reinvest Option in a Growth Fund?

There are basically two schemes in a mutual fund: growth and dividend. The Dividend Option does not reinvest the gains made by the funds through its investments and gives it to the investor from time to time. The concept of growth fund in equity type of mutual funds is that all the profits made by the fund are put back into the scheme. This actually makes the NAV or the Net Asset Value rise over time.



The NAV of the growth fund will always be higher than that of the dividend option because instead of money being given back to the investors, it is actually going into the scheme. Actually, taking dividend or growth option is a subjective matter and you do not really gain or lose. You are either getting money regularly(if you choose dividend) or at one go(if you choose growth). An investor who chooses the growth option makes money by selling units at a high NAV at a future date. When you choose the dividend option, the NAV may not be as high as that of the growth fund but you can get the money regularly, time and again.

Let us take an example of a mutual fund with a NAV of Rs.20. It declares a dividend of 20 percent which means it will be giving back or paying 20 percent of the face value. Let us say the face value of the mutual fund unit is Rs. 10, the NAV being 20. So it gives you Rs. 2 per unit; if you own 1000 units, you will earn Rs. 2000. Since you have already been paid Rs. 2 per unit, the NAV becomes Rs. 18 from Rs. 20. If you had invested in the growth option, you could have sold the units for Rs. 20. When you invest in the dividend option, you can sell the units for Rs. 18 since you already got the Rs. 2 per unit as profit earlier.

You should know that dividends though tempting, is not guaranteed. If a mutual fund declares dividend twice last year, it does not imply that the same thing will happen this year. You may not even get a dividend this year. It has been observed that funds whose NAV is more than 10 is in a strong position to declare a dividend. However, declaring dividend is the fund.s prerogative and decision, the period and the amount is not fixed.

Choose growth fund if you are looking for a long term investment and are not invested in money being sent to you regularly, reducing the size of the kitty at the end when you redeem the money. If you like to receive small bits of money at regular intervals, choose the dividend option.