Can you please tell me what is the difference between returns in growth option vs dividend option in a fund. An example to elaborate the same would be highly appreciated.
- Himanshu
When you choose the growth option, all profits of the scheme is invested back into the scheme. The growth of your investment will be reflected in the higher NAV of the scheme. The dividend option offers a part of your investment back to you. When a fund declares dividend, the NAV of the scheme goes down proportionately.
For example, you have invested ₹10 in a scheme. Suppose the NAV of the scheme is ₹10. The NAV has appreciated to ₹12 over a period time. In the dividend option, the fund will declare a dividend of ₹2 and you will get ₹2 back from your investment. Under the growth option, the NAV of your scheme will go up to ₹12. If you want to take out any money, you will have to sell your holdings.
The significance of dividend vs growth option is that it helps investors to choose an option depending on their money needs. For example, a person who is looking for a periodic income, would opt for dividend option. Alternatively, a person who has a steady income would opt for the growth option to grow his investment over a long period. However, the person would be liable to pay short-term or long-term capital gains tax on his investments, depending on when he sells his investment. Dividends are tax-free at at the hands of investors.
This article was originally published on October 12, 2015.
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