Which mutual fund plan is better, growth or dividend? This question is common as every investor wants to get maximum return on their investment. Hence, when they invest in a mutual fund, they need to choose the fund type, either a growth fund or a dividend fund.
The growth fund provides the return with the risen value of the Mutual fund’s units. In contrast, the Dividend fund gives a return based on periodic dividends. This may sound confusing, but it is still crucial to know as a wise investment to get complete advantage of the investment scheme. Hence here in this post, you will learn the difference between growth and dividend mutual funds.
What is Growth Fund Scheme?
A growth fund scheme in Mutual Funds is the famous investment option that most investors choose for their investment. In this mutual fund investment scheme, the investor invests money whenever it earns some dividend or any benefit then reinvested in the scheme. By which the earned profit is shown in the NAV or Net Asset Value. If the fund gets some profit, the NAV increases, and if the fund faces loss, it decreases the NAV. If you invest in the growth fund stocks, you will only be making profits if you sell out or redeem the funds. Thus, it can be a great mutual fund investment option if you want to invest in the long run.
What is Dividend Fund Scheme?
In the dividend fund scheme in Mutual Funds, the dividend or profit of the mutual fund does not reinvest. Hence it does not show in the NAV or Net Asset Value of your investment. And when the fund makes a profit, it gets distributed among the investors as a dividend, and here the dividend amount does not reinvest in the scheme. The dividend can be distributed on a quarterly, semi-yearly, and yearly basis. The dividend amount can vary as it does not stay fixed by the company, and investors profit even if they do not sell the funds. But if you choose this investment option, you will not get the high profit and return as alike growth fund. Because they also invest the earned money and hence, in the long run, you can multiply your earnings.
Difference between Growth and Dividend Mutual Fund
Before moving to the comparison table to compare the growth vs. dividend funds, let’s discuss some common and significant differences. Because these differences will help you to get desired return, balance tax liability, and attain maximum satisfaction from the investment option.
Goal for Investment
If you also feel confused between dividend and growth funds, then you should first decide the goal. You should think about why you are looking to invest and achieve from the investment. This will give you clarity and help you to choose the best option and also solve various questions. If your goal is to get a regular income, then the dividend funds are good options. As you can get profit amount on quarterly, half-yearly and yearly basis. However, if you want to maximize your wealth, the growth fund will be an excellent option for investment in mutual funds. As here, your earnings also get investment and bring a fruitful return when you redeem or sell those.
Tax Treatment
Tax treatment is also a significant factor that you must consider before investing your money. If you invest in the growth fund, then you are eligible to get tax on redemption. In simple terms, you only need to pay the tax when you sell your funds to earn profit. And if you sell your funds in the long run, then there is mostly no tax. And if you invested in debt funds, there will be zero tax if you redeem your money after three years. However, the tax treatment for dividend funds is a bit different, and here you may be eligible to pay tax. But you receive your profit after deducting the tax; hence you do not need to pay the tax on the received profit. However, the Mutual Funds already deduct the tax money before it reaches you. Thus, if you think there will be any tax benefit to you, you should reconsider your investment decision.
Profits or Returns
In most cases, the growth funds provide a high return compared to dividend funds. Thus, if you invest in the growth fund, the mutual funds will invest that money into the high return generating companies. Those who give the return guarantee will have more profit, but if there is loss, you also have to suffer from maximum loss. However, dividend funds provide less income, but the dividend amount does not stay fixed.
Working Process of Growth vs Dividend
In a growth fund, the fund manager reinvests the earned profit in the funds. And if there is profit, then the NAV will increase and lose, then NAV will decrease. But if it increases and the fund generates profit, then it will give more return. But in a dividend fund, the return value does not add to the principal value. Hence, the earning potential is limited.
| Base | Growth Mutual Funds | Dividend Mutual Funds |
| Profit | The profit is reinvested in the growth funds to achieve more returns. | The profit is distributed after deducting the tax amount to the investors. |
| Amount of NAV | In most cases, the amount of NAV stays higher compared to dividend funds. | As the dividend amount is paid to the investor hence generally, the amount of NAV stays less. |
| Scale of Return | The total return of the growth scheme stays more than the dividend funds. | In the dividend fund, the total return stays comparatively lower than the growth funds. |
| Tax Benefit | Here short term and long-term capital gain apply for taxation purposes. | Here income tax applies when you redeem or get the profit. |
| Ideal Option For | It is an excellent option for wealth making and get a higher return in the long run. | It is suitable for making regular income from the mutual fund’s investment. |
Which One is Better for Investor?
Both investment options are great, but a dividend scheme is a better option if you want income regularly. But if you want to maximize your total earnings in the long run, you should look for growth schemes. Both are risky, but if you can take a bit of risk, growth funds can bring an impressive profit.
Conclusion
This article discussed growth vs dividend funds and learned about the difference between growth and dividend mutual funds. We tried to understand its fundamentals based on the objective of investment, tax benefit, and return scale. I hope you liked this information and now will be able to use this information in your next mutual fund investment.