ET Classroom: Growth & dividend options in MFs
ET looks at the main choices available to a mutual fund investor and the advantages of each.
1. What are the options available to a mutual fund investor?
There are three primary options available: ‘growth’, ‘dividend’ and ‘dividend reinvestment’. If no choice is exercised at the time of application, the fund house will select the default option for that scheme as mentioned in the application prospectus.
2. How does the dividend option work?
Under this option, you will get paid from the profits made by the fund. Most debt schemes aim to pay a monthly dividend. In the case of equity-oriented schemes, a dividend is declared as and when there is a surplus. An important point to note: dividends in mutual funds are not guaranteed. In the dividend reinvestment option, dividend is not paid to the investor, but is used to buy more units of the same scheme.
3. What happenes to the NAV when dividend is paid?
This dividend gets deducted from the net asset value (NAV) of the scheme. For example, if your scheme has an NAV of Rs 25 and the fund house declared a 10% dividend (Rs 1 on a face value of Rs 10 per unit), the NAV will decline by Rs 1 to Rs 24 after paying the dividend. The NAV goes down to the extent of dividend paid. Investors who need a regular income, choose this option. Also, in case of dividend reinvestment, the NAV of the scheme declines after the dividend is paid.
4. What happens under the growth option?
In this option, the scheme does not pay any dividend but continues to grow. If the fund buys or sells stocks and makes a gain, the amount is reinvested into the scheme. This gain is captured in the NAV, which rises over time. If your aim is to build long-term wealth, then the growth option would be the right choice.