MUTUAL FUNDS- GROWTH OR DIVIDEND PLAN, WHAT TO CHOOSE 🤔?
While choosing a mutual fund, an investor requires to make a range of
choices. Among them, the most puzzling decisions are the ones relating to
choosing between growth option or dividend option. An investor needs to make a
choice based on their personal needs and financial goals. However, once the
investor gains clarity on these aspects, making a choice will seem easy. There
is also a dividend reinvestment plan, however, as it is not often used and hence we
shall not dwell on the same. It is important to note that NAV of growth and dividend plan is always different.
As there is change in NAV, investors might wonder if the schemes
are different or same?
The scheme is the same and the difference in NAVs is due to the dividend
distribution and compounding effect. In both options, the scheme invests in
identical securities but the manner of distribution of profit varies. The
investment objective, holdings, performance and fund manager, remains the same.
Only the manner of delivering returns changes. At a gross level, the wealth effect
is the same in both cases. Each type of fund has its advantages and
disadvantages, and deciding which is a better fit will depend on your
individual needs and circumstances as an investor.
What Is a
Growth Option?
You may perceive the growth option like a
cumulative investment scheme option. In a growth plan, the fund does not payout
anything to the investors by way of regular payouts. All the profits of the
fund are reinvested in the fund and therefore your wealth compounds. So,
whenever the scheme makes a profit, its NAV rises automatically. Conversely,
when the scheme suffers a loss, the NAV falls. The only way to get back profits
is to sell units of the scheme.
What Is a Dividend Option?
In case of a dividend option, profits made by the scheme are not reinvested in the scheme. Instead, gains will be distributed among the investors by way of dividends; on a quarterly, half-yearly or annual basis. However, the fund doesn’t guarantee as regards the amount and frequency of dividend payment. Usually, the fund manager declares the dividend only when the scheme generates profits.
Lets have a Comparision of performance between the Growth and Dividend option:
What fits better in your long term financial plan?
This is one area where the growth plan really scores over the dividend plan. When you opt for a dividend plan, the fund regularly pays out dividends out profits and to that extent your NAV reduces. But do you reinvest these dividends? More often than not, investors use the dividends for other purposes and to that extent your wealth diminishes. Growth plans on the other hand are auto compounders. Since the profits are automatically reinvested by the fund, the growth plan is more in sync with long term wealth creation. The power of compounding works best in case of growth plans. Also, when you make a financial plan you peg your SIPs to specific goals. A growth plan ensures that you can estimate returns more credibly and hence long term wealth creation becomes more predictable. In case of growth plans, it is always more in sync with financial planning.
Keep Sharing, Keep Gaining!
-By CA Dhruval Shah
You may reach out to me at dhruvalcshah@gmail.com.
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