Growth vs Dividend: Which option to pick for Mutual Fund investments?

Should I choose growth option or dividend option in mutual funds is a question that always pops in every investor’s mind.

At the outset, it has to be clarified that the mutual fund, fund manager, objective of the scheme as well as the basket of stocks/securities remains the  same under both the options.

What varies is the the net asset value (NAV) of the mutual fund. Under dividend option, NAV of the mutual fund is usually lower than that of the growth option.

Secondly, in case of growth option, you will not realise any monetary gains until you sell the units. However, in case of dividend option, every asset management company (AMC) declares a dividend pay out based on the performance of the scheme. So you earn some monetary return even as you continue to hold the investment.

As an investor, what should be your pick? That depends on the time horizon of your investment.

Choose Growth Option for long-term investments

For equity mutual funds, financial advisors recommend growth option as you may benefit from the  compounding effect, assuming you stay invested for long-term.

The power of compounding refers to process of earning returns on reinvestment of assets, which have already generated returns. This means the asset will be generating returns on an asset’s reinvested earnings.

So, the earlier you start investing and longer you invest, the asset has a potential to generate a higher return on the investment amount. In fact at a stage, the growth in investment is higher, more because of the compounding effect than the size of the investment.

Hence you should opt for growth option for equity mutual funds for long term investments

Dividend options are tax friendly for short-term investments

If you invest in debt mutual funds for short term needs (less than a year), you can consider dividend option or dividend re-investment option as dividends are not taxable in your hands.

Under the growth option, the returns will be taxed as short term capital gains and you will be taxed as per your income tax slab rate.