Growth Or Dividend: What Suits Me the Best for Investment?
You must have read the letters (G) and (D) written in front of a mutual fund scheme’s name. Do you know what they signify? They are meant to be the growth and dividend option of investment offered by a particular scheme. What do they offer and which one suits your requirement is the question you might have in your mind. Let us help you get an answer for the same.
While selecting a mutual fund for investing the capital, an investor has to make an endless number of choices. There are various categories, schemes and fund houses between which the investors are required to consider the one that suits them the most. Besides these, one is required to opt for a fund with a growth option or a fund with a dividend reinvestment option. Both of them have their own advantages and disadvantages, and deciding which is the best among them depends on the individual needs and circumstances of an investor.
In the case of growth option on a mutual fund, an investor does not receive any dividends on the stocks in which s(he) has made investments. Although some shares in equity mutual funds pay regular dividends, by opting for the growth option, the investor allows the fund house to plough back the earnings instead of distributing it to the investors. With this, the NAV, i.e., the net asset value of the programme is increased which leads to accumulation of great wealth. This option is best suited to the ones who wish to appreciate capital in the future and must not be opted by the ones who have regular cash requirements. Moreover, it is the best way for the investors to raise the net worth of their investment values and generate considerably higher amount at the time of sale. Although the number of shares or units are less but the gain over a period of time is substantial in this case. Accordingly, the fundholder becomes capable of earning a huge capital over a period of time.
On the flip side, the dividend reinvestment option is quite variant. The dividend is the amount which is paid to the shareholder out of the total earnings by the company. The same amount is reinvested by the fund house in purchasing more number of shares. In this case as well, cash is not moved out and paid, instead, it is automatically used by the fund's managers to buy more units on behalf of the investors which is transferred to individual investors' accounts. With this, the unit holders realise a capital gain by selling more number of units than what they actually purchased at the time of investment.
None of the investment options out of dividend and growth is perfect. You need to opt for the one that suits your requirement. While considering both the alternatives two things must be kept in mind, viz.: investment objective and taxes. For equity funds, growth is the best choice as it would let you gain the benefits of compounding. By earning ‘interest on interest’, you would be able to generate greater wealth for your future to accomplish your long-term financial goals. Furthermore, the capital gain on such investments are exempted from tax and hence, it would help you manage your taxes by reducing the total liability.
On the contrary, if you have to make an investment for a shorter duration, then debt funds are the best options, and in them, you must consider the dividend plans. They would help you in achieving financial stability in the short run to accomplish your financial needs. Moreover, the dividends are non-taxable in the hands of the investors, and thus one would not have to pay tax on their earnings. In this way, investors can gain substantial benefits by making an investment in the dividend plans.
We hope this blog must have helped you in understanding the difference between the two alternatives available for investing in mutual funds. You can opt for any one of them in order to achieve your investment goals. But still, if you have doubts in any parlance and need instant advice, you can communicate with our experts anytime to sort out your concern. MySIPonline has an expert team of analysts to guide you in taking worthwhile financial decisions.
LTCG Tax Is Not As Negative As it Seems; Here’s Why?47544 min read Jan 01, 1970
Sensex Plunges Over 1000 Points; Should You Buy or Hold Your Investments for Correction?46423 min read Jan 01, 1970
Sensex Dives Nearly 840 Points: Things to Consider and Experts’ Take47403 min read Jan 01, 1970
Budget 2018: Frequently Asked Questions(FAQs) Concerning LTCG Tax Proposal50195 min read Jan 01, 1970