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 .