What is growth option in mutual funds?

Question

There are different options in mutual funds like dividend payout option, dividend reinvestment option and growth option. What is the difference between dividend reinvestment option and growth option

Answer 1

When selecting a mutual fund, an investor has to make an almost endless number of choices. Among the more confusing decisions to be made is the choice between a fund with a growth option and a fund with a dividend reinvestment option. Each type of fund has its advantages and disadvantages, and deciding which is a better fit will depend on your individual needs and circumstances as an investor.

The growth option on a mutual fund means that an investor in the fund will not receive any dividends that may be paid out by the stocks in the mutual fund. Some shares pay regular dividends, but by selecting a growth option, the mutual fund holder is allowing the fund company to reinvest the money it would otherwise pay out to the investor in the form of a dividend. This money increases the net asset value (NAV) of the mutual fund. The growth option is not a good one for the investor who wishes to receive regular cash payouts from his/her investments. However, it's a way for the investor to maximize the fund's NAV and, upon sale of the mutual funds, realize a higher capital gain on the same number of shares he/she originally purchased - because all the dividends that would have been paid out have been used by the fund company to invest in more stocks and grow clients' money. In this case, the fundholder does not receive more shares, but his/her shares of the fund increase in value.

The dividend reinvestment option is quite different. Dividends that would otherwise be paid out to investors in the fund are used to purchase more shares in the fund. Again, cash is not paid out to the investor when dividends are paid on the stocks that comprise the fund. Instead, cash is automatically used by the fund's administrators to buy more fund units on behalf of the investors and transfer them to individual investors' accounts. Fundholders realize a capital gain upon the sale of their units in the fund, which in the case of the dividend reinvestment option will probably be more fund units than they started with.

No single mutual fund is perfect for every investor; that's why there are so many out there with so many different options. When investing in a mutual fund, it's best to examine all of the particulars of the fund, to avoid investing in a fund that doesn't suit your individual requirements for growth or cash payout.

Answer 2

Dividend reinvestment option is that the dividend accured to you will be reinvested as part of your principal instead of the same being paid to you. E.g. If you have put in Rs.50000/- in mutual fund and your interest for the period is 10% and Rs.5000/- is payable to you, instead in the above option Rs.5000/- will be invested in the same fund and can buy you one unit (depending on the minimum price for one unit)

Growth option is also the same thing as above. But you need to check with the mutual fund (management company) how your amounts will be treated with respect to both the schemes.

Answer 3

I think what you mean is there are different types of mutual funds. A Growth fund invests in stocks / companies that show strong potential of growing the company and the price per share of stock. A growth and income fund looks more at companies / stocks that issue good dividends.

Answer 4

In the Dividend option, periodically the dividend is paid to the mutual account holder. Whereas in the Growth option the periodical dividend is added to the NAV of the member so it is added to the mutual fund account.

Answer 5

Just another way to confuse you while ripping you off with their hidden fees. :o)