Mutual Funds (MF) are one of the safest investment options that promise good returns for the investor. However while making an investment in mutual funds, an investor has to make endless choices, amongst which are choosing between a growth option and a dividend reinvestment option; this choice is the trickiest. Both options have their own set of benefits and drawbacks and deciding which one is better depends on one’s personal needs and requirements.
What is the Growth option?
By choosing the growth option in the mutual fund, an investor will not get the dividends that are remunerated by the stocks of the mutual fund. Instead, the amount paid to the investor as the dividend is further reinvested. This increases the net asset value (NAV) of the mutual fund. The growth option in the mutual fund is good for investors who do not want regular earnings from their MF investments. Also, it is a sure shot way to maximize the fund’s NAV and realize a higher capital gain, on the same number of shares that he/she originally invested in, at the time of selling mutual funds. In the growth option, the fund holders don’t get more shares; instead his/her shares of the funds increase in value.
What is Mutual Fund dividend?
The dividend reinvestment option in mutual funds is quite different from the growth option. Here the dividend is paid to the investor so that he/she can purchase more shares. Still the payment is not made to the investor; instead, the cash is routinely transferred to the fund managers who buy more funds on behalf of the investor and transfer funds to their mutual fund account. The fund's holders, in this case, realize the capital gain at the time of sale of the units of the funds. Unlike the growth option, investors will gradually have more fund in dividend option than they have started with.
The Comparison
The dividend reinvestment option is suitable when the market is high as this is the time when you are more likely to get good returns. Mutual fund dividend is also the safest option for those who want to get regular cash from their investment. This means stay-at-home-parents; retired individuals should pitch for a dividend option.
The growth option in mutual funds, however, is ideal if you have a steady income and you are not dependent on your investment for money. Here the results are compounded and tend to get higher at the time of maturity. In mutual fund growth option, if you continue to invest for more than one year, your investment will be tax-free. Otherwise, you will have to pay short-term capital gain tax. In dividend option, no such tax has to be paid by the investor. Here fund houses pay the dividend distribution tax.
Conclusion
Concluding the above topic, it can be stated that no mutual fund is perfect for all categories of investors. Thus to determine the most suitable option, you must give consideration to three factors - Cash requirement, Time Frame, and Tax efficiency. In addition to this, you must also do a thorough research on the list of advantages and disadvantages associated with each fund type.
A mutual fund investment is one of the safest investment options. It is a far better investment alternative than hoarding your money in the savings account. With mutual fund investment, you can not only keep your money safe but also earn good returns, more than a savings account would ever give. One rule of thumb, the more money you’ll invest the more returns you are likely to get on your investment. Also, the time period pays a vital role in mutual funds investment. Investors who invest for a longer tenure are more likely to get high returns and many tax benefits than those who invest for a short period of time.
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