Growth Scheme Vs Dividend Scheme - Which is better?
Mutual funds have emerged as popular vehicles for investment in recent times. By investing through mutual funds in equity assets, you can get inflation-beating returns on your investment and grow your wealth significantly. The way you plan your asset allocation makes the difference. Choosing between a fund with the growth option and a dividend payout option is based on your financial goals. This article will learn about these two options in detail and know which is better suited for you. Let’s get started.
What are Growth Mutual Funds?
In growth mutual funds, profits made by the scheme are reinvested. There is no “dividend” for unitholders. By reinvesting profits into the scheme, growth mutual funds allow the investors to earn profits and thereby reap the rewards of compounding. Therefore, growth mutual funds are a better choice for those looking to generate maximum returns instead of regular income.
What are Dividend Mutual Funds?
In the case of dividend mutual funds, the profits made by the scheme are not reinvested; instead, they are distributed equally among the investors in the form of “dividends”. These dividends are paid to the investors as payouts at a regular frequency: monthly, quarterly, semi-annually, or annually.
However, the dividend payouts are not guaranteed as they are dependent on the profits made by the mutual fund scheme. The Asset Management Company declares dividends when the scheme generates adequate profits.
Dividend mutual funds are beneficial for investors who are looking to generate a regular stream of income.
Growth Vs. Dividend Mutual Funds
As you can see, the primary difference between the growth and dividend mutual funds is how profits are distributed to the investors. While they are reinvested in the case of growth mutual funds, providing compounding returns to the investors, they are paid directly to them in the form of regular payouts in the case of dividend mutual funds.
Let’s discuss some more differences between growth and dividend mutual funds based on specific parameters and decide which one is better for you:
- Investment objective
The investor’s investment objective plays a crucial role in determining whether they should opt for the growth or dividend mutual fund. If you want to generate regular income from your investment, you should go for the dividend option. On the other hand, if you’re going to stay invested for a long-term horizon and earn compounded returns, the growth option will work best for you.
- Net asset value
The type of mutual fund impacts its Net Asset Value (NAV) in the long run. The fund manager invests all the profits in the case of growth mutual funds, which improves their NAVs. On the other hand, the gains are deducted from the funds’ NAVs and distributed to the investors in the case of dividend mutual funds, causing a decline in their NAVs.
- Total returns
Usually, the returns provided by growth mutual funds are higher than the dividend mutual funds. The gains are reinvested into the scheme, which allows the investors to benefit from the effect of compounding. However, by investing in a growth mutual fund, they lose out on receiving the regular payouts. Also, in case of a downfall in the market, they can lose their entire investment.
- Tax benefits
Taxation rules for the returns received from growth and dividend mutual funds are very different from each other. Investors are not required to pay any tax on growth mutual funds unless they redeem their investment. And when they save their investment, the returns are taxed as per the long-term or short-term capital gains taxation rules.
On the other hand, payouts received from dividend mutual funds are added to the annual income of the investors and taxed as per the applicable income tax slab rate.
For some investors, growth mutual funds are a better option, while for others, dividend mutual funds are better. However, it’s up to you to decide which one is more suited for you. You can consider various parameters while determining, such as your personal choice, investment objective, and investment horizon.
If you want high returns and more tax benefits, you should opt for the growth option. However, if you are looking to generate a regular source of income, the dividend option would be more profitable for you.