Mutual Fund Growth Options & Dividends

You have decided to take advantage of the tremendous flexibility that mutual funds offer. One such flexibility offered is whether you want to receive income from your mutual fund investment or let your income remain invested till you cash out of the scheme. While the former is called ‘dividend option’, the latter is called ‘growth option’. Let’s understand both these options better.

Dividend option offers you regular income. Dividends are distributed by the fund depending on the distributable surplus that the scheme has accumulated. As an example, if you own 1,000 units of a mutual fund and the fund declares a dividend of Rs. 3 per unit, you will get Rs. 3,000 as ‘dividend in an equity oriented scheme‘. However, in other schemes, the scheme would have to pay a Dividend Distribution Tax (DDT) and hence the dividend you receive would be lesser by that amount. The Net Asset Value (NAV), which reflects the realizable value that you will get if you sell your mutual fund investment, will fall proportionally and get readjusted after the dividend is paid. (Note: The NAV in reality may not fall exactly to the extent of dividend declared. NAV is also impacted by changes in prices of securities invested in.)

Growth option on the other hand, does not offer you any regular income; instead all the money that the scheme generates from its investments is simply put back into it in order to generate capital over time. So this means that you will always have the same amount of units that you purchased when you entered the scheme. The NAV of the scheme keeps changing according to fund performance.

Choosing between Dividend and Growth Options

Choosing between dividend and growth options is a matter of individual choice and needs. It may also depend on whether you are investing in equity or debt funds. However, it is best to keep in mind that if you are an investor with a need for regular income, it is best to opt for the dividend option. You will get an element of liquidity from your investments, as some of the money that you invested will flow back to you regularly. If your aim is to let your money grow in the long term, choose the growth option. In the growth option you get the benefit of compounding as the returns on your investment are reinvested, this is not the case in the dividend option.