There are different kinds of mutual fund options available in the market. Every mutual fund scheme you choose will have two options: growth or dividend option. You can differentiate them based on their Net Asset Value (fund’s per share market value). Always remember, the various factors such as the behavior, objective, fund manager are all the same but the performance and results delivered are different.
Under the growth options, you have to stay invested for a longer period to see the growth. The returns you earn are not realized immediately. You will not receive any payment in the form of dividends. The returns are realized only when you sell the units. The NAV on the date of the investment will be your cost price and the NAV on the date of sale becomes a selling price. The difference will be your returns.
The profit your funds make remains in the market and you get the benefit of compounding over the years. The number of units you buy remains the same, but the price or NAV keeps going up. It best suits for the investors who don’t need an income from their investments today but are targeting a corpus for future use.
The dividend options allow you to book profits periodically. This option is good for investors who need periodic income from their investments. The amount of dividend is not certain. When the NAV reaches a certain level, the fund house pays out the dividend. The dividend-reinvestment is different from your dividend options. In the dividend reinvestment option, profits are booked, but instead of declaring a dividend, the fund’s house buys more units at the current price. So your number of units goes up but the NAV remains the same.
Which option is best to choose?
This depends on factors like your investment objective and tenure. For Equity Mutual Funds, the growth option would be the best because you can make compounding earnings. If you plan to invest in the short term, Debt mutual funds will be the best. For short term investment in debt funds, you can go for a dividend option.
- Long-term needs: Equity Mutual fund with growth option is better.
- Short-term needs: Debt Mutual funds with dividend option is advisable.
- Mid-term needs: Debt Mutual funds with growth options can be better.
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