The concept of investing has grown exponentially.

These days, there are multiple investment opportunities for an investor in the financial market.

One can invest through mutual funds, banks, shares, gold, real estate and many other instruments, in accordance with their risk appetite and investment duration.

Each of these modes has their own advantages and disadvantages.

But remember, not all investment modes can be suitable for every investor.

Why?

Because investing depends on various factors like age, risk, objective, investment horizon etc.

For example – An investor in the age group of 60 would prefer capital security, as the returns will be required for day-to-day expenses.

On the other hand, a young investor will prefer taking a risk as he/ she has ample time to remain invested.

Having discussed multiple investment options, let us now unfold a new instrument to our readers – Mutual funds.

What exactly are mutual funds?

Now we’re absolutely sure that you must have seen/heard of mutual funds at least once in your life.

Mutual funds are considered one of the best opportunities to invest as these have the ability to beat rising inflation over the long-term.

However, mutual funds are subjected to market risk, given the fact that their underlying securities are linked to the capital market.

While the returns are good in mutual funds, it is volatility.

Basically, mutual funds, especially equity mutual funds, are not recommended for the short term.

In the long term, meaning more than 5-6 years, the investment can thrive.

While you have a gamut of funds to choose from (click here to explore the funds), we will restrict our discussion to the types of plans available for each mutual fund scheme.

We will also cover the suitability of each plan under each scheme.

Read on!

What are the types of plans offered under each fund scheme?

There are three types of plans offered under each scheme:

  • Growth plan
  • Dividend payout plan
  • Dividend reinvestment plan

 

Characteristics of Each Plan

Growth Plan

The main features of this plan are:

  • There is no cash payout
  • Profit is plowed back
  • In the long term, growth plans provide compounding benefit 

Dividend Payout

The main features of this plan are:

  • The fund takes away a dividend from the profit accumulated
  • Dividends are credited to the investor’s account or paid by cheque
  • NAV is adjusted to the extent of the dividend paid. Thus, the NAV in dividend payout is lower than that of the growth plan
  • They are suitable for people looking for a regular monthly income

Dividend Reinvestment Plan

The main features of this plan are:

  • Similar to the dividend plan, but the dividend declared is not paid but re-invested to buy additional units 

This table illustrates the working of investment under different plans.

Growth Plan Dividend Payout Dividend Reinvestment
Units bought (April 1, 2018) 10,000 10,000 10,000
NAV 10 10 10
Total value of investment (Rs) 1,00,000 1,00,000 1,00,000
NAV as on 30-6-18 12 12 12
Value of investment 1,20,000 1,20,000 1,20,000
Dividend NA 2 2
Dividend payment NA 20000 NA
Dividend re-invested NA NA 1666.66*
NAV post dividend 14 12 12
Post Dividend Value 1,40,000 1,20,000 1,40,000

Note:*20000/12=1666.66; NA – Not applicable; Source: Groww

As you know, mutual funds share their realized profit periodically, by way of dividends.

Investors who have opted for the dividend plan will receive these dividends.

Under the dividend reinvestment plan, these dividends are only declared but are not passed on to investors.

This dividend amount is used to purchase additional units of the scheme.

Thus, an investor who has opted for the dividend reinvestment plan will see a higher number of units allocated to their folio periodically.

But does this option actually help you earn more returns?

Is it any better than the growth option that also plows the profits back into the scheme?

In simple words, a dividend reinvestment plan doesn’t make sense, as the value of investment under the growth option and the dividend reinvestment option remains the same at the end.

While the number of units increase, there are no additional returns generated under the plan.

Thus, we do not see any reason for opting the dividend reinvestment plan in case of an equity or a balanced scheme.

Conclusion

We believe that the main objective of investing in equity and balanced schemes is capital appreciation over a long-term period.

Thus, it is better to stick to the growth plan.

Also, dividend declaration may attract some additional expenses that may be adjusted to the NAV.

Thus, if you are looking at long-term investment, it is better you stick to a growth plan and if you are looking for steady income at regular intervals, dividend payout plan looks is your go-to scheme!

Happy Investing!

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