Mutual funds are categorized based on various characteristics.

One of those characteristics hinges on returns.

When talking about returns, there are two types: Growth Mutual Funds and Dividend Mutual Funds.

When you invest in any mutual fund, the fund manager invests your money in equity, debt, and other money market instruments.

Many mutual funds also invest in a combination of these.

Growth Mutual Fund

Growth mutual funds are more famous and widely invested in.

Whatever earnings the fund makes from this investment is reinvested or held in cash to invest later.

The way you make money in mutual funds is by selling the units of the mutual fund held by you.

Dividend Mutual Fund

Dividend mutual funds share almost every trait with their counterpart growth mutual funds – the fund manager, allocation, objective, etc.

The key difference though is that they pay dividends to the investors.

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. Below are some popular mutual funds:

Below are some popular growth mutual funds:

Mirae Asset India Opportunities Fund. 

ICICI Prudential Focused Bluechip Equity Fund.

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.

People who are greatly dependent on a sum of money and yet want to mobilize it to earn more money can opt for dividend mutual funds.

This way, there is some form of capital protection while still getting regular dividends.

They invest their money in a dividend mutual fund and live off the dividends instead of directly eating into their savings.

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.

Another group among which dividend mutual funds are very popular are new investors.

New investors might not have the patience to wait too long for returns. They are easily gratified by the much sooner and regular returns received in the case of dividend funds.

Tax

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 even before reaching 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.

Know more about SWP here.

Every investor’s needs are different.

Study mutual funds carefully before choosing.

What might be good for someone else, might not be the best for you.

Happy Investing!

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