A very frequently asked question about investments is what type of scheme is best, Dividend payout or Dividend Re-investment or Growth Funds. The answer depends on lot of factors. If you would want to invest your money for a long duration and maximise returns then dividend reinvestment or growth option is best suited.
Following are the choices when an investor invests in mutual funds
Growth: Any return or profits earned by the mutual fund is ploughed back in the mutual fund and hence investors are not paid any dividends. Since there is no declaration of dividends, the NAV increases which is a good sign for the fund. In such a case investors can sell their mutual fund at a higher NAV and get a return.
Dividend payout: Under this the profits of mutual funds are distributed amongst the investors at various intervals. These dividends will only be paid when a mutual fund performs well. It also depends upon the mutual fund manager’s decision as to when and how much dividend to pay. It’s basically a cut in the net asset value when dividends are declared. More the dividend declared higher will be a fall in the NAV, therefore payment of dividends is not very good for the fund value.
Dividend re-investment: In this case the dividend which is paid out is ploughed into the mutual fund that means an investor can buy more units in the mutual scheme from the dividend income which is declared at the existing NAV. In this case there is no difference in the NAV. The NAV of the fund remains the same.
Growth fund option is best suited when you want to invest your money for a longer period and hence looking for a higher NAV with time.
Dividend option must be selected if you are in need of money from time to time. Dividend from an equity fund is regarded as a tax free income.
In case of dividend re-investment option, it is quite similar to growth fund just that new units are purchased from the declared dividend income which is not distributed to the investor. The most advantageous part about this scheme is that it is best as regards to tax saving.