Whenever an investor plans to invest in some scheme, he/she has to make an almost endless number of choices to pick the right one. Same goes for mutual fund investors who are stuck between a fund with a growth and a fund with a dividend reinvestment option.
But, what’s the difference b/w them?
Which one is better suited for me?
Just to be clear, each type of mutual fund has its own advantages and disadvantages. To understand the differences and go in-depth first we would check out the major difference b/w these two mutual fund schemes.
Growth Option Vs Dividend Reinvestment Option
Mutual Fund with Growth Option
The best thing about growth option on a mutual fund is the facility to maximize the fund’s Net Asset Value (NAV) and a higher capital gain on the same number of original shares purchased – because all the dividends that would have been paid out have been used by the fund company to invest in more shares and increase clients’ money.
In short, we can say that investors with growth option mutual fund do not receive more shares but their original shares of the fund increase in value.
However, the growth option mutual fund is not a right option for the investor who wishes to receive regular cash payments from his/her own investments. Investors in this fund will not receive any dividends.
Mutual Fund with Dividend Reinvestment Option
“MF with Dividend Reinvestment Option” as the name implies, certain dividends paid out to the investor in the fund which is used to purchase more shares. The important thing to remember here is the dividend is not in the form of cash. On the contrary, the dividends are paid on the stocks in the fund. The major difference b/w dividend reinvestment and growth option are investors have a dividend to buy more fund units and increase the no. of shares owned over time.
Which one is better?
Now it is time to understand, “which one will help to get extra returns?”
Well, there are a lot of arguments on growth and dividend reinvestment option, which is why we will see what professionals think of it. We believe it will certainly help you to get a hint of both sides and help you make smart decisions.
According to Vinit Iyer, Founder, Wealth Creators Financial Advisors, a dividend reinvestment plan doesn’t make any sense. Ultimately, the value of an investment will remain same at the end. The only difference is of a number of units which will increase in dividend reinvestment plan. Apart from this, you won’t get to see much difference between them.
According to Tarun Birani, TBNG Capital Advisors, who also vouches for growth option plan instead of dividend reinvestment plan says the only reason to opt dividend reinvestment is a reward in form of capital appreciation over a long period of time, however, the capital gains are tax-free after one year.
But, it doesn’t mean all people agree with this. There are some who don’t share the same. Like, Ankur Garg, Director, Diva Jyote Portfolios who thinks that Dividend reinvestment plan is good when you are going for liquid funds where the time is short and the dividend is paid on the daily or weekly basis.
Final Thoughts: –
Overall, we can say that no MF is perfect. That’s why there are different schemes with plenty of options out there. The best way is to check for the attributes and do the analysis before investing in any fund scheme. Both growth and dividend reinvestment have their pros and cons. You can choose the MF according to your investment and the unique requirement for future returns.