Besides multiple factors to consider while investing in the mutual funds, selecting between a dividend and growth mutual fund is an important task for making a successful investment. But before doing that you really need to know the in and out of dividend and growth mutual fund for taking a wise decision vis-à-vis your financial goals and requirements. The growth option on a mutual fund means the investor will not receive any dividend which is otherwise paid by the stocks. Rather the amount will be reinvested to maximize the fund’s net asset value (NAV). The dividend option, on the other hand, is completely different wherein the investor receives a sum of money at a regular interval from a company out of its profit.
Needless to say, both dividend and growth mutual fund has own share of advantages and disadvantages and deciding which is a better fit depends on your personal needs and objectives as an investor. Nonetheless, here in this blog, we are going to present three valid reasons to support why you should attend the growth mutual funds.
Long-term wealth creation: When you choose a dividend plan, you receive a sum of money each time the dividend is declared which in turn reduces your long-term wealth. For example, XYZ equity fund had NAV of Rs. 10 when it was launched in 2010. After five years, the NAV of the growth option increased to Rs. 45, while the NAV of the dividend option rose to Rs. 19 only. The remaining 26 was paid to you in the form of the dividend for over past five years.
The problem you will face when you will have to meet your much needed financial goals because the dividends you received over time were most likely spent for various expenses if not reinvested further. So, a growth mutual fund is a better option for meeting a long-term investment goal.
For specific life goals:
If you have a specific goal to meet within a specific period of time like arranging a foreign trip, sponsoring higher education for children, paying the margin money on car loan or home loan or retirement planning then nothing can substitute a growth mutual fund investment. The growth option will give you the benefits of compounding over a long term as the reinvestment will happen automatically.
Loan against mutual fund units:
Today, almost all banks are ready to offer you loan against your mutual fund units. Usually, in case of equity funds you can get a loan against mutual fund units with a 50% cut of the NAV value of the funds. If you have a growth plan, you are likely to get a higher loan to value (LTV) which will be beneficial for you further in getting a higher leverage value. This is another great reason why should consider a growth mutual fund.
As a general rule, investing in growth plan mutual funds and large cap mutual funds is advisable for meeting the long-term investment goals and objectives.