Growth or Dividend

POSTED BY Amar Negi ON September 25, 2010 6:55 pm COMMENTS (3)

Growth or Dividend which option will help me in long term investment in Equity Mutual Funds? I am a novice in this field and it will be good if you suppourt the answer with an example? Thanking you for your hardwork, to all the answer givers

3 replies on this article “Growth or Dividend”

  1. JayaprakashReddy says:

    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 impact on the NAV

    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.

    How does this impact us?

    We don’t gain or lose per se by selecting any one scheme.

    Either we make the choice to get the money regularly (dividend) or at one go (growth).

    If we choose the growth option, we can make money by selling the units at a high NAV at a later date.

    If we choose the dividend option, we 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 18. It declares a dividend of 20%. This means it will pay 20% of the face value.

    The face value of a mutual fund unit is 10 (its NAV in this case is 18).

    So it will give us Rs 2 per unit. If we own 1,000 units of the fund, we will get Rs 2,000.

    Since it has paid Rs 2 per unit, the NAV will fall from Rs 18 to Rs 16.

    If we invest in the growth option, we can sell the units for Rs 18.

    If we invest in the dividend option, we can sell the units for Rs 16, since we already made a profit of Rs 2 per unit earlier.

    What we must know about dividends

    The dividend is not guaranteed.

    If a fund declared dividends twice last year, it does not mean it will do so again this year. We could get a dividend just once or we might not even get it this year.

    Remember, though, declaring a dividend is solely at the fund’s discretion; the periodicity is not certain nor is the amount fixed.

  2. Always go for Growth option. Dividend in simple terms means “profit booking by company” on behalf of customer. If you get dividend, you will go for shopping or new mobile phone, but you’re not going to invest it again. So, ultimately, even after 20 years, you’ll have only your initial amount in mutual funds.

    And if you’re planning to invest that amt. again, why do you need dividend.

    The mutual fund company also have to pay Dividend Distribution tax, whose expenses are cut from whole AUM.

    Here is a link with good example.

    Hope it will help you.

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