In this video we will learn the difference between Growth Option and Dividend option of Mutual Funds.
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Growth Mutual Fund
Growth mutual funds are more famous and widely invested in.
Whatever earnings the fund makes from this investment is reinvested in the same mutual fund scheme.
Dividend Mutual Fund
Dividend option returns are paid via periodic dividends.
The key difference though is that they pay dividends to the investors.
These dividends are not fixed.
Types of Mutual Fund Dividend Plans.
The dividend plan of a mutual fund scheme is available in different varieties
Dividend payout,
Dividend reinvestment
And dividend sweep.
Under the dividend payout plan, the dividend declared is paid into your bank account.
Whereas the dividend reinvestment plan reinvests the dividend in the same fund that has declared the dividend.
And the dividend sweep plan invests the dividend in units of another mutual fund of the same fund house.
Are Mutual Fund Dividends Same As Stock Dividends?
Mutual Fund and stock dividends are two different things. While stock dividends represent profits earned by a company, mutual fund dividends are not an indicator of the profitability of a mutual fund scheme. High mutual fund dividends do not mean that the fund is doing very well or otherwise. When a mutual fund scheme declares a dividend, the NAV (Net Asset Value) of the concerned scheme falls by a corresponding amount. For example, if a mutual fund with a NAV of Rs 20 declares a dividend of Rs. 2 per unit, the NAV of the scheme will fall to Rs. 18 per unit.
Hence, an investor should not invest in a mutual fund just because it pays high dividends and should think which plan of the scheme suits him/her more – growth or dividend.
When Are Mutual Fund Dividends Declared?
The right to decide the timing of declaration of dividend completely rests with a fund house. An investor has no say in it. However, an investor can control, when does he/she want to sell his/her mutual fund units and realize the involved capital gains, if any.
Tax in Growth Mutual Fund
Growth mutual funds are subject to tax on redemption.
You are not charged tax until you take out money from a mutual fund.
TAX in Dividend Mutual Fund
Dividend mutual funds are taxed a bit differently.
You do not have to pay any taxes upon receiving your dividend. However, the tax is paid by the mutual fund even before reaching you.
In that sense, dividend mutual funds are not very tax efficient.
If you require a fixed income and have a large amount of money to invest, you should consider investing using the SWP (Systematic Withdrawal Plan) option.
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