When investing in mutual funds, one important decision for the investor to make is the decision between the growth option and the dividend reinvestment option. Even though the two investment strategies share the common goal of adding value to your investment, there are differences between the two investment strategies and their impact on the financial well-being of the investor.

Understanding the Growth Option

The growth option is concerned with creating wealth over a period of time. In the growth option, the earnings made on the investments under the scheme are reinvested back in the plan instead of being paid out to the investors. Here, the Net Asset Value (NAV) of the overall fund increases over a period of time due to the growth in the value of your investment. This option is particularly relevant to those investors whose need for income is not critical or who are willing to be invested for a long period. This is because, having your investment returns reinvested, you reap the benefits of compounding. This means your money has the potential to grow faster over an extended period. In addition to this, there are tax implications only when you withdraw your funds under this growth option.

The Dividend Reinvestment Alternative: Understanding

Within the dividend reinvestment option, the mutual fund declares dividends from time to time. But instead of paying the dividend amount directly to you, it buys more units of the same fund in your name. This means the number of units you hold increases with time, which can contribute to the overall value of your investment. Though this approach also enjoys the benefit of compounding, the NAV usually decreases when a dividend is declared because the payout is adjusted against the fund’s value. This option can appeal to investors who favor the idea of steadily building up more and more units without having to invest further money actively.

Key Differences You Should Know

The basic difference between the two is that both work in different ways as far as returns are concerned. In the growth option, the investment value grows by an appreciation in the NAV while the number of units remains constant. The dividend reinvestment option, on the other hand, brings in more units for you, although its NAV is corrected periodically. Thereafter, there is the case of taxation. Growth schemes are considered more tax-efficient since taxes, if at all, are levied only at the time of redemption. In the case of dividend-paying schemes, dividends are normally taxed as per the income slab of the investor, thereby bringing down the total returns in the case of certain investors.

Which Option Should You Choose?

Both growth and dividend reinvestment options are designed to improve your investment. However, they have different uses. The growth option is geared towards long-term wealth building, while the dividend reinvestment option works towards increasing your investment over time. Knowing the difference between the two options and relating it to your needs will help you formulate a better investment plan. Indeed, it is not just the investment option that succeeds but also the option that supports your path towards financial stability.

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