At their broadest classification, mutual funds have two options – growth and dividend. The difference between the two lies in how the return on your mutual fund investment is used. You can select one of the two options as per your investment objective and how you want to use your return on mutual funds.
While both types of mutual funds have their advantages, it is recommended that you understand the nuances of both these options so that you make you investment based on the factors you are looking for.
| Differences | Growth mutual funds | Dividend mutual funds |
| Use of the return | In growth options, the profit that you earn from your mutual funds is reinvested in the scheme. As your return gets reinvested, you will be earning profit not only on the principal amount in the future but also on the reinvested return. As your investment volume widens, you stand to benefit from the compounding of returns, i.e. profit on profit. | In dividend options, the returns or profits earned by your investment is paid back to you at the end of a certain period. You can check your mutual funds online statement for these payouts. Generally, this interval is annual, but there are mutual funds that also pay quarterly, monthly, or even daily. Known as dividends, these returns are paid from the profit accumulated in the scheme during the agreed period. |
| Growth prospects | Assuming the growth of the fund scheme is constant, the NAV of your mutual funds investment will keep increasing, as your SIP or lump sum investment, as well as the profit thereon, will continue to grow. | With each payout, the NAV of the scheme gets adjusted, resulting in its drop in value. The growth is principal-based without any compounding of return as the dividend gets paid off regularly. |
| Tax implications | You might attract short term or long term capital gains tax depending on the period for which you have invested. | The payouts are also liable to income as per your taxable income and the slab you fall into. |
| Suitability | Growth mutual funds are preferred by investors who don’t need any regular income flow from their mutual fund investment. Investors in growth mutual funds generally do so for the long term and are happy to see their investment accumulate in the long run. | This option is recommended for SIP and regular mutual fund investors who wish to redeem their earning regularly for personal purposes or to invest them elsewhere. |
To sum up,
Since every investor’s need are different it’s important to take a close look at all kinds of financial offerings so that you pick the right one for you. With Tata Capital Moneyfy app, you can check which option is the best for your financial needs, including these two return-based options.