Mutual Funds : Dividend Or Growth

In most mutual fund (MF) schemes, an investor can choose what he wants to do with the profit made on his investments—get it in hand or plough it back into the scheme

What’s the difference?

The basic difference is in the way the returns on investments are treated. In a growth option, any profit made on investment is not distributed but retained in the scheme. In a dividend option, the investor gets back the return as dividend.

Another difference is in the net asset value (NAV). In the dividend option, the value of the scheme’s assets falls once dividend is paid out. Hence, the scheme’s NAV is usually lower in the dividend option compared to the growth option.

The tax treatment for the two options is also different. Dividend from an equity fund is tax-free, but dividend from a debt fund is subject to dividend distribution tax (DDT) in the hands of the MF at 14.2 per cent, including surcharge and cess. This tax is paid out of the dividend earned.

Take a closer look

1. Dividend option

When you invest in an MF and the fund makes a profit out of your investment, the fund manager does not reinvest the profit into the scheme but distributes it among the investors from time to time.

After dividend is paid, the scheme’s NAV falls by the same value as the dividend, which is calculated on the basis of the launch value of the scheme’s units (usually, Rs 10 a unit). Let’s take an example. The current NAV of X fund is Rs 20 and it declares 50 per cent dividend. The fund’s NAV will fall by Rs 5 (50 per cent of face value of Rs 10). So, the NAV will now be Rs 15.

Dividend option is of two types—dividend payout and dividend reinvestment. In the first type, the dividend amount goes to the investor. In the latter, the fund allots more units to the investor. The value of these units equals the dividend amount and is based on the revised prevailing NAV of the scheme. As the dividend is reinvested, the number of units in an investor’s portfolio grows according to the amount of dividend.

From the returns angle, there is no difference between dividend reinvestment and growth options of equity funds.

2. Growth option

Any profit made from an investor’s money is reinvested into the scheme. The number of units remains the same, but the NAV keeps growing with time.

This is why the NAV of a growth option is always higher than the dividend version of the same scheme.