All about Dividend Fund, Growth Fund and dividend reinvestment

6 Nov 2020  Read 307 Views

Options Available. Isn’t that an attractive phrase?
Human beings want options for everything; be it food, clothes, houses, cars, mobiles, home appliances, or choosing life partners!
Anything that does not come with an option seems like a forced thing to do, which makes it boring, and sometimes, people avoid buying or doing it all together.

In the material world, even banks and investments come as a group of a variety of opinions to choose from. Even for saving or investment purposes, the market has a plethora of options available, thus helping people choose anything they want according to their preferences.

Similarly, in the case of Mutual Funds, there are a variety of options to choose from. As we already know, there are various different types of mutual funds schemes; however, some schemes also provide a variety of options that investors can choose from, based on their financial goals, preferences, and expectations.

Even investors who have low or limited liquidity cash resources can choose from these options available and invest in mutual funds according to their preferences.

However, sometimes having low liquidity cash might not open as many doors for you to invest and gain higher returns. The individual will be happy to know that there is an option that offers options to low liquidity cash resources of individuals.“Mutual Fund” offers various options for those investors who have limited liquidity cash resources.

Various Options Available in Mutual Funds

These options offer various schemes according to the investors’ preferences; for example, some investors wish to invest for a long time but need a regular cash flow while some wish to stay invested and want to grow their shares’ value or increase the number of shares in their accounts. These options offer higher returns to their investors.

The following options are among the most popular in the market:

Dividend Option

Any mutual fund scheme like equity, debt, or hybrid fund schemes, can offer dividends to their investors or unit holders from the profit of their portfolio. These profits or interest rates (if the fund manager invests in debt securities) are made from the investment in various instruments like equity, debt securities, money market, etc.

A dividend fund scheme can pay dividends to their investors monthly, quarterly, or yearly, depending on one scheme to another. There is no guarantee to get the dividends at a fixed time, as it depends on the market and fund managers.

A Dividend scheme can offer regular dividends, which is decided by the fund managers. This fund scheme may take a longer period to show real growth in your investment.

This scheme may be ideal for those investors who need some cash flow as this fund scheme offers quicker dividends.

Investors who invest in the dividend fund schemes typically depend on the dividends that the fund manager offers them after getting a higher profit in the investments.

This scheme can be a good option for those investors who do not have the patience to wait for a long period for their investments to grow and have a trading mindset to get quick and regular returns.

Growth Option

In the Growth Fund, investors of mutual funds do not receive the dividends in case the scheme makes a profit. In the growth option, the fund manager of the mutual fund company reinvests the dividends of the investors that were actually meant to be paid. This reinvested dividend amount shows the increments in the NAV(Net Asset Value) of the mutual fund company.

This option might not be ideal for those investors who need regular cash flow.

The growth option might be useful as this fund scheme reinvests investor's money, and this cycle goes on continuously until the investors withdraw their funds.

Investing through the growth fund option for a longer period might help you gain higher returns as this scheme reinvest your money.

Dividend Reinvestment Option

As the name suggests, in the Dividend reinvestment fund scheme, the fund manager does not pay the dividends to their investors; instead, he purchases the new shares on the behalf of the investors and transfers the new shares to the investor’s accounts.

By doing this, the number of owned shares by the investor keeps growing, and the investor’s accounts keep growing the value of shares over time. When in the future, if the investors wish to sell their units, they realize that the number of units has been increased than the ones they started with.

Some of the companies also offer this option at no cost.

Particulars 

Growth Plan 

Dividend Payout Plan

Dividend Reinvestment Plan

Units Bought 

1000 Units 

1000 Units

1000 Units 

Date of Purchase 

1st April 2019

1st April 2019

1st April 2019

Purchase NAV

Rs. 10

Rs. 10

Rs. 10

Value of Purchase 

Rs. 10,000

Rs. 10,000

Rs. 10,000

NAV on 31st March 2020

Rs. 14 

Rs. 14 

Rs. 14 

Value of Investment 

Rs. 14000

Rs. 14000

Rs. 14000

Dividend Declared 

N.A.

Rs. 2

Rs. 2

Dividend Paid Out 

N.A.

Rs. 2

N.A.

Units issued in lieu of Dividend 

N.A.

N.A.

166.66*

Post Dividend NAV 

Rs. 14

Rs. 12

Rs. 12

Post Dividend Units 

1000 Units

1000 Units

1166.66 Units

Post Dividend Value 

Rs. 14000

Rs. 12000

Rs. 14000

*Dividend of Rs. 2000 (1000x2) will entitle to 166.66 units (Rs. 2000/NAV of Rs. 12)

Difference Between Dividends, Growth, and Dividend Reinvestment

In the case of Dividend funds, the profits gained by the fund managers are equally distributed to the investors.

However, in the growth fund, the fund manager reinvests the dividends that were meant to be paid to their investors. Dividends are paid to be deducted from the NAV (Net Asset Value), which might be lower.

In dividend reinvestment, the NAV might be higher because of the reinvestments. Returns on the dividends might be lower as compared to the growth option.

Growth and dividend reinvestment might be similar to each other in terms of profits. Just like in dividend reinvestment, the profit/dividend is also directly invested in the fund in the growth option.

Final Thoughts

Having a lot of cash reserves with you can easily offer you a lot of options of investments and offer you a steady return. However, in case there are limited resources of cash, the Dividend, Growth, and Dividend Reinvestment are some options in mutual funds that might be ideal. These schemes are typically focused on an individual’s preferences and offer them expected returns.

But before investing in these schemes blindly, investors should have prior knowledge of the industry and be clear on their financial goals and expectations from the scheme, which can help them choose the right mutual fund option for them.

Investors get regular cash flow with the dividend scheme but while investing in the growth and Dividend reinvestment investors get increment in the value and number of their shares because of the reinvestment cycle and for staying for a longer period in these schemes. These options can fetch higher returns if one stays invested for a long time and can also help avoid market fluctuations in the short term.

About the Author: Divyanshu kumar | 29 Post(s)

Divyanshu is currently pursuing a Master's degree in Financial economics. Growing up, he has always been interested in codes and numbers which he has gradually learnt to express in words too.

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