Difference between Growth and DIvident option in mutual funds

People are confused , really confused …

There are 3
Mutual Funds Options (Growth , dividend , dividend Re-investment) and we will discuss those today. There are lot of misconceptions and myths which add to confusion in the world of mutual funds and agents use it against investors and make them fool …



Different Options in Mutual funds

1. Growth Option

Under this option you get the units at the time of buying and you have same number of units till the end. The NAV keeps changing according to performance

2. Dividend Option

This is the most misunderstood option in mutual fund.

Dividend option in mutual funds means that you will be repaid some amount of your investments every year and it will be called as “dividends” , this helps those people who want some regular returns every year from their investments in mutual funds.

People think that dividend is something extra which they receive other then their investments which is not true :) , Dividend is declared per unit basis, if you have 100 units and MF declares dividend Rs 4 per unit , you receive Rs 400 , and you think that your earlier investments have the same worth , where as it decreases by the amount you receive as dividend , because its paid out of your investments only . The NAV of the unit goes down after paying dividend proportionately.

Example : let assume you have Rs 1 lac of units in a mutual fund with NAV of Rs 100 , you will have 1000 units . dividend declared : Rs 20 per unit

How it works : You will get Rs 20,000 and then your remaining worth will be Rs 80,000 and as you have 1000 units , the NAV will go down to 80 . So your actual worth is same as Rs 1 lac . The only advantage to you is that you are getting liquidity with your investments and getting regular cash every year, unlike growth option.

Agents generally lure investors to invest in NFO’s claiming that if company declared dividends, they will get more dividend compared to existing funds as they will have more units, Which is nothing but a idiotic myth :)

3. Dividend reinvestment

In this option ,the step is as follows

– Re-adjust the NAV assuming that dividend is paid.

– after that buy more units of same MF with that dividend money and allot it. So ultimately the number of units increases and the NAV goes down. In this case dividend money is not given to the investor but re-invested in the same scheme.

Example : let assume you have Rs 1 lac of units in a mutual fund with NAV of Rs 100 , you will have 1000 units .
dividend declared : Rs 20 per unit

How it works : Your dividend will be Rs 20,000 , and NAV will come down to Rs 80 like it happened above. Now this 20,000 will be re-invested in same mutual fund and you will get extra 250 units (20000/80).

Your Total units = 1250
NAV = Rs 80

Worth = 1250 * 80 = 1,00,000

Which one is better Dividend or Growth ?

It depends . There is no thumb rule to decide which one is better then the other, it depends on the situation and your needs.

When is Growth Option better ?

If you are a person who earns well and does not need regular money back from your investment and if you are looking at long term investments then growth option is best for you because your investments gets compounded , which does not happen on the dividend part in dividend option as it goes back to investor and its never part of future growth .

When is Dividend Option better ?

If you are a person who need regular money every year from investments for some purpose, It may happen that you have more responsibilities and more dependents and if any small money which you get extra every year is helpful to you , in that case you can go for dividend option.

Conclusion :
Different options in mutual funds are for different types of investors , before investing just see what do you want from your investments and take appropriate option.

Returns in long term from Dividend and Growth : Below is an example which shows the returns from similar funds with growth and dividend options and there performance over 3 years.


I would be happy to read your comments or disagreement on any topic. Please leave a comment.

145 CommentsAdd Comment

  1. Suresh

    Hi Manish,

    Very good advice given here. I plan on investing Rs 25000 in the Franklin Templeton India High Growth company fund (Direct-Growth) and then later plan on investing Rs 1000 on a quarterly basis. Are there lock-in periods for mutual funds in general? Franklin Templeton’s website doesn’t mention this anywhere and if I plan to pull out of the fund in 3 years, there is no tax correct? What is your view on this fund?

    Thanks!

    Suresh

  2. shitanshu

    Hi Manish,
    I am very new in MF.I invested 50000 Per year on HDFC pro growth plus balanced fund for at-least 5 years.Please tell me my decision is good or not?

    And i want to Purchase some MF in SIP ,Please suggest some GOOD MF.

  3. Hey,

    Thanks for clearing the whole confusion between G and D. I was using moneycontrol to search mutual funds and was totally confused for terms. Lucky I found you on Google.

  4. VB

    I am not sure if it is the right thread. Pardon me for polluting if it is.

    What is the tax liability on mutual fund like SBI Bluechip?

  5. Nirmal

    Hi Manish,

    Great insights from this thread :) A couple of silly questions:

    Is there any scenario in which a dividend plan at some point of time is reduced to zero units, since my investment amount is going down regularly?

    How regularly are dividends paid? Quarterly, Yearly?

    Is it logical to say that for higher risks MFs we go with dividend option to continuously lower your risk, specially when the invested amount is high?

    Thanks,
    Nirmal

  6. Manish

    When Return will in negative zone and NAV falling down then via Dividend options will help to buy units at lower prices in Growth options you did not have those. Specially in case of ELSS Dividend options provides you additional money which you can invest in ELSS again and get Tax benefit….there many positives of Dividend options….

  7. dr jitendra mittal

    Iam having 1000 units SBIMF magnum mutiplie regular 93 growth option.
    No I want to convert these units to Dividend option. How many units I will after
    conversion of units from growth option to Divedent payout option

  8. raj

    Hi Manish,

    I have a doubt.

    According to the example you have shown above.
    In G plan NAV of Rs. 100 rises up to NAV of Rs. 420 after 3 years(if there is such a rise in 3 years)

    So investment of Rs. 1,00,000 at NAV of Rs. 100 (1000 units) becomes Rs. 4,20,000 because of NAV of Rs. 420 after 3 years.

    where is the investment getting compounded ???

    It simply depends on the NAV status after 3 years.

    If the NAV at the time of selling is less than the NAV at the time of investment, then one is in lose after 3 years of waiting time.

    Awaiting your response.

    Thanks
    Raj

  9. Rajat Sharma

    Hi Sir,

    I will be new one to join Mutual fund schemes. I have just chosen for onvesting lump sum amount of rs.30000 in HDFC and Reliance Tax saver funds.

    Will it be a gòod option or i should choose any other funds.

    please reply.

    Thanks,
    Rajat Sharma

  10. dibyendu

    hi manish.
    I am a new investor .I want to invest Rs.1000 per month in each the following mutual fund
    1. icici focused blue chip fund for 20 years.

    2. icici discovery fund for 15 years .

    3. uti opportunity fund for 20 years.

    4. uti mid cap fund for 15 years.
    I am confuse to choose in between growth fund and reinvestment fund.I want long term invest meant.can u help me.what I ll choose growth or reinvestment.plz rply

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