Spend, Save and Invest Smartly
Yesterday one of my Relationship Managers called me from his client place and he told me, “My client is confused whether to go for a growth or a dividend option, please speak to him”. I did speak to him, but he was arguing with me that dividends are something extra, which he can avail from a fund. Therefore my dear readers, today I would like to discuss on various things related to the growth and dividend option of a mutual fund, so that you will not get confused while investing in a mutual fund.
A mutual fund generally offers two schemes: dividend and growth. The dividend option does not re-invest the profits made by the fund though its investments. Instead, it is given to the investor from time to time. In the growth scheme, all profits made by the fund are ploughed back into the scheme. This causes the NAV to rise over time.
The NAV of the growth option will always be higher than that of the dividend option because money is going back into the scheme and not given to investors.
You don't gain or lose anything by selecting any one scheme. Either you make the choice to get the money regularly (dividend) or at one time (growth).
If you choose the growth option, you can make money by selling the units at a high NAV at a later date.
If you choose the dividend option, you will get the money time and again as well as avail of a higher NAV (though the NAV here is not as high as that of a growth option).
Say there is a fund with an NAV of Rs 24. It declares a dividend of 40%. This means it will pay 40% of the face value. The face value of a mutual fund unit is 10 (its NAV in this case is 24). So it will give you Rs 4 per unit. If you own 1,000 units of the fund, you will get Rs 4,000. Since it has paid Rs 4 per unit, the NAV will fall from Rs 24 to Rs 20. If you invest in the growth option, you can sell the units for Rs 24. If you invest in the dividend option, you can sell the units for Rs 20, since you already made a profit of Rs 4 per unit earlier.
The dividend is not guaranteed. If a fund declared dividends twice last year, it does not mean it will do so again this year. You could get a dividend just once or you might not even get it this year. Generally, funds whose NAV is above 10 are in a position to consider a dividend. Remember, though, declaring a dividend is solely at the fund's discretion; the periodicity is not certain nor is the amount fixed.
This depends on your overall investments and income. If you are looking at a long-term investment and are not interested in money being given to you at various intervals, the growth option is meant for you. If you are keen on receiving an income at various intervals, opt for the dividend option.
Dividends from a mutual fund are not taxed. When you sell the units of a mutual fund and make a profit, it is known as capital gain, which will be taxed under the prevailing income tax laws.