A mutual fund scheme that invests in growth stocks to get maximum returns through capital appreciation is known as growth mutual funds. Here the fund managers seek companies with a proven track record and invest in ventures with great revenue growth or younger companies with growth potential. However, investors of such funds are exposed to higher risks.
Since the primary goal of these funds is the appreciation of capital, they do not invest much in dividend-paying companies. Growth funds are capable of providing investors with high returns when the market conditions are bullish.
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Thus the mutual fund portfolio is made up of large-cap, mid-cap and small-cap companies that promise fast growth and delivers high returns to the investor. He earning are then reinvested and such funds consist of little or no dividend payout. Thus these investments can affect the investor badly when the market falls. Similarly, it can reap high returns when the market is high.
See Also: How Mutual Funds Work?
In case of dividend mutual fund, the fund house invests in stocks of profit-generating companies that give significant dividend payment to investors. The gains are distributed among the investors by payment of dividends on a quarterly or annual basis. However such funds do not provide a guaranteed amount of dividends. Usually, the fund manager declares dividend payment when the fund generates profits.
Let’s evaluate the following points to understand the basic difference between the two options:
Since growth funds invest in high yielding stocks of revenue-generating companies thus they promise high returns. However, on a growth plan, the fund does not pay anything to the investor in the form of a regular payout. Whereas, in a dividend option the fund pays dividends out of the profits and thus income is generated. Thus the downfall of growth fund is that you are at a higher risk and may lose your entire investment in case of downfall of growth funds. However, if you invest for a long tenure you are likely to gain much higher returns compared to dividend-paying mutual fund schemes.
This is one area which investors must look out for while choosing between growth and dividend mutual fund option. Investment is growth funds are extremely volatile as the stocks experience a sudden rise or fall in prices. Thus these funds are suited for investors with high risk-tolerance.
In case of dividend payment, the mutual fund tries to pay dividends on a regular basis and stick to their mandate but the payment is not guaranteed. Also, the amount of dividends paid to investors is not fixed.
The investors have to pay high fund management charges while investing in growth mutual fund schemes. The AMC will utilize a part of your profit to pay off the fees each year.
When you invest in mutual funds through fund house you will have to pay fund management fee along with high DDT if you have invested in debt funds. However, if you have invested mostly in equity mutual fund then you will not have to pay DDT. Thus dividend equity funds can be a better option for investors who are looking for intermittent income through moderate risk investments.
See Also: Mutual Fund Returns
Since growth mutual fund reinvests the profits, the NAV of the growth mutual funds is likely to appreciate or remain the same. But in the case of dividend mutual fund, the NAV of the fund depreciate as soon as the dividend payment is announced. Also, a high dividend payout may not be a good sign as they may indicate that the company has very fewer opportunities to grow.
Depending on the above assessment you can decide where to choose growth mutual funds or dividend mutual funds. In general growth, the option is better than the dividend option for investors who are looking for wealth appreciation. The dividend option works best for investors who are looking for a regular stream of income.
Some drawbacks of dividend payment are investors lose the opportunity of compounding of returns as the dividends may not be invested in the scheme. Thus you receive regular payment but your wealth doesn’t appreciate it. On the other hand, the growth option is good for investors having a long-term investment horizon. It will grow your money and help you create a corpus over your investment horizon. If you have a regular income and you don’t need side income, then the growth option is the best for you.
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