Dividend or Growth funds, what should you buy?

Investors opting for mutual fund seem to be spoiled for choice. Although, there is not much to choose from these alternatives as many of them only differ by name. This is the reason why market regulator, SEBI is planning to streamline the number of mutual fund schemes. This will go a long way in helping customers select right kind of fund. 

Nevertheless, fund houses will continue to provide options even after such streamlining of funds. One of them is the option to select dividend or growth fund.  

Under the dividend option, mutual fund scheme pays out a periodic dividend to you. The dividend is paid out of profit earned by the scheme and once the dividend is paid, NAV will drop by a similar amount. Hence, if NAV of a fund is Rs 20 and it declares a dividend of Rs. 2, after payment of dividend NAV of scheme will drop to Rs 18. This is helpful for someone looking for regular income from their investments such as retirees. This is also helpful for an investor who does not want to be invested for long-term and wants to reap the benefit of capital appreciation and not lose out in case there is a major fall in the market. It is not much of use for investors who have invested very less. Therefore, if you are investing Rs. 10,000-15,000, the dividend pay-out will not be substantial. Distributing dividends does not mean your fund is doing well like a listed company paying a dividend. Mutual fund scheme pays dividend out of capital.  

In case of growth option, you do not get the benefit of regular pay-out. Rather all the profits are re-invested back into the scheme. This gets reflected in the NAV, which increases as profits increases. In case of any liquidity requirement, you can sell the units and get cash. This is the reason you will find NAV of growth option higher than dividend option.  

The type of fund you should invest in will depend upon your objective of investing in the fund and what is your goal. If it is for wealth creation and you are a long-term investor, then you should go for growth funds. However, if you want a regular cash flow and you’re investing a substantial amount you can go for dividend option.