Difference between Growth and Dividend mutual fund

Mutual funds provide multiple options to investor to choose from – Growth, Dividend and Dividend Re-investment.

we will look into difference between these options and when to choose one over another.



Growth:

In a growth option, the cash flow or income earned by the mutual fund scheme is re-invested back by the mutual fund scheme and it is not dis­trib­uted. The change in NAV value will reflect the per­for­mance of the mutual fund scheme.

Dividend
In this option a part of profit made is paid back to the investor in the form of dividend from time to time. The amount and frequency of dividend paid depends on the profit made by the fund and is at the discretion of the fund manager. Thus dividend payment is not guaranteed. Moreover, dividends are paid out from the asset of the fund. Whenever dividend is paid, NAV of the fund goes down proportionately.

One key point to note is that dividend paid by mutual funds is “return of capital” and not “return on capital”. This is quite different from the dividend received in stocks.
For example, an investor holds some stocks of ABC co. and the company declares dividend. In this case dividend is paid from the profit made by ABC co., money gets transferred from ABC co. to the investor. However, CMP (Current Market Price) of stock remains same.
Thus the dividend received by the investor is over and above the money that he can realize by selling  stock. But in case of mutual fund, dividend is paid from the fund asset i.e investor’s money is paid back to the investor. This confusion is often misused by many distributors to sell funds to investors.

Dividends are not taxable in the hands of the investors.

Dividend Re-investment
This is a variant of Dividend option, wherein dividend is paid in form of units of the same fund. Thus dividend that was supposed to be paid to investor is used to buy units and is credited to his account.