What is the difference between growth and dividend funds? Which one should I opt for?

There are many aspects to be considered when you invest in a mutual fund and whether to choose between a growth option and a dividend option of a mutual fund is one of them. Both these options are for different investors with varied financial needs and there’s no correct or better option.

Let’s first understand what these options are:

Dividend option:

After you invest your money in a mutual fund, the mutual fund company or AMC then invests the money in the equity market and keeps buying and selling stocks based on their performance. The profit thus generated from the process of buying and selling is then distributed directly among investors, such as you, after the AMC deducts its expenses.

Although dividends are not guaranteed, AMCs choose to pay it in the form of cash directly in investors accounts to reward them and encourage new investors as well.

Growth option:

In the growth option, instead of paying the dividends to the investors, AMCs reinvest the dividend earned in the same mutual fund scheme. This results in a higher net asset value (NAV), so when the investor redeems his/her investors he/she will enjoy higher returns.

Getting to the second part of the question- which one is better suited for you.

Ideally, a senior citizen or a person who needs liquid cash regularly, should opt for the dividend option. However, a young adult who’s just started working or any individual who can easily go about his/her day-to-day activities and expenses without needing the extra cash from mutual funds should opt for the growth option. This ensures the dividend keeps getting reinvested in the mutual fund scheme and helps maximise the compounding effect of your investment.