Mutual Fund Growth vs Dividend - All You Need To Know

Let us understand the difference between a Growth plan and a Dividend plan in mutual funds and their impact on the scheme’s NAV:

Under a growth plan, profits are ploughed back into the scheme. These returns get reflected strictly in the form of capital gains.  This means that by not distributing any profits to the unitholders, the cash held by the fund is retained into the scheme. The retention of cash balance results in a marginally higher NAV as compared to the dividend plans. Growth option is well-suited to investors who do not have high liquidity requirements.

Under a dividend plan, profits are paid out to the investor in the form of cash or units in the same mutual fund scheme. When profits are transferred to the investor’s account, it is known as the Dividend Payout Plan. On the other hand, when profits are converted into units and re-invested into the scheme, it is known as the Dividend Re-Investment Plan (DRIP).The investor can choose between a Dividend Payout plan or a Dividend Re-Investment Plan based on his liquidity needs or wealth-creation goals. Let us get a detailed insight into these two plans:

• Dividend Payout Plan: Here, the NAV of the scheme reduces to the extent of dividend paid out as well as the dividend distribution tax (DDT). The dividend amount gets credited into the investor’s bank account. This reduces the cash balance of the scheme’s portfolio, thereby reducing its net asset value (NAV). However, the payout of dividend has no effect on the number of units held by the investor.It is important to note that under the Dividend Payout option, the dividend can be appropriated only out of the profits of the scheme and not the capital. Some types of debt-oriented and liquid funds declare dividend very frequently. Thus, dividend payout plan can prove to be a great source of income generation for the investor.
• Dividend Re-Investment Plan: Here again, NAV of the scheme reduces to the extent of dividend and dividend distribution tax (DDT). However, the investor is not actually paid out the dividend amount owed to him. This amount is converted into units and re-invested into the scheme.  The additional units are allotted to the investor.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.