Mutual funds are a popular investment medium for many investors . Most of us choose mutual funds very carefully , but we don’t always choose the mutual fund option with that much attention . The two most common mutual fund options are Dividend and Growth . Its important that you select the right option for you .
In the dividend option you receive the dividend money , but in the growth option that dividend amount is reinvested in your mutual fund scheme . To understand better let us take the example of HDFC Equity Fund which started in 1994 , its November 2011 NAV for the growth option is 240 Rs. while the dividend option NAV is Rs. 40 only . This difference of 100 Rs is nothing but your own money paid back to you . For me dividend is like partial profit booking . In the mentioned example this partial profit is 100Rs . The performance of any fund is calculated on the basis of growth option and not dividend option .
The greatest benefits of dividend options is that you get the tax free dividend money . You get the money periodically in form of dividend which you can either invest somewhere or you can also use in your day to day expenses . Another advantage of dividend option is that your money is less exposed to market fluctuation , as some part of the NAV you have received already in the the form of dividend ( which I called as partial profit booking ) ,so in case the market shakes your less money is at risk .
The true benefit of dividend option can be achieved only when you are utilizing that dividend money . If you keep it in your saving account it will only grow by 4% but if you invest it somewhere else it can grow by more than 4% . There are many people who forget that their mutual fund has paid dividend and the money is lying in their bank .
Abhishek is an Engineer MBA in Finance and Certified Research Analyst. He is an active trader and investor in the stock market since 2010. Follower of the philosophies of Warren Buffet and Peter Lynch in investing and trend following in trading.