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Growth Mutual Fund vs. Dividend Mutual Fund

03 November 2021

When it comes to mutual funds investment there are different categories to select from. When you invest in any mutual fund, the fund manager invests your money in equity, debt, and other money market instruments. So you have categories including oequity largecap, debt, equity Midcap, liquid funds and and thematic funds.

But before considering investing in any of these categories, it is important to understand the type of mutual funds (MFs) you, as an investor, want. That is, should you go for growth mutual funds or dividend mutual funds.

Some of the mutual funds schemes invest in a combination of these as well.

What are Growth Mutual Funds

Growth mutual funds are more popular among investors.

What it means is that, income generated by the fund is reinvested or held in cash to invest later.

What are Dividend Mutual Funds

Dividend mutual funds are slightly different from growth MFs. The key difference is that, these MFs pay dividends to the investors. Note that, these dividends are not fixed.

The frequency and amount of dividend to be paid is left to the discretion of the fund manager. The most common frequencies are monthly and quarterly.

Why Growth Mutual Fund

Growth mutual funds have one very considerable advantage over dividend mutual funds: compounding.

Every time the investments of a growth mutual fund makes money, it is reinvested. This cycle continues until the point you as an investor decide to pull out.

Over a long period of time, growth mutual funds can work wonders for your money. However, this requires patience. If you are dependent on this money, you will have to sell units of the mutual fund you own. That will reduce the amount you have invested. Since the amount you have invested is reduced, the effect of compounding is hampered.

Why Dividend Mutual Funds?

Dividend mutual funds offer regular dividends that are decided by the fund managers.

Dividend mutual funds take longer to show the same results that a growth mutual fund does. However, one major advantage dividend mutual funds have is that they start paying back much quicker.

This offers a certain peace of mind to the investors. Certain investors would trade peace of mind for higher returns and dividend mutual funds suit them best.

Taxation

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. For most equity mutual funds, if the investment is redeemed after a year, you do not have to pay any taxes. For most debt funds, there is no tax liability after a period of 3 years.

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 houses even before the dividend reaches 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.

Every investor’s needs are different. Study mutual funds carefully before choosing.

Happy Investing!

Disclaimer: The views expressed in this article are that of the author and not those of Groww

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