Mutual fund Unclocked: Different options, how to find which suits you?

Investment in any instrument should be done according to one’s risk appetite and duration. As each investment vehicle and its variation has its own set of advantages and disadvantages, deciding which is best suits you will depend upon an individual’s needs and circumstances.
Mutual funds also come with different options such as ‘growth’, ‘dividend’ and ‘dividend reinvestment’. Choosing the best option will depend upon your investment horizon and your cash needs.

Growth Option: In this option of mutual funds, an investor will not receive any dividends that a fund may decide to pay out. All the profit of the fund gets reinvested. This option gives the compounding benefit and is suitable for someone with a long-term investment horizon. In the short run, due to market volatility, your fund might not grow at all.

Dividend Option: This option helps an investor to get regular pay-out in the form of dividends. It gets credited to their bank account. This is better for those investors who wish to receive a cash payout from the investments. Nonetheless, an investor should know that dividend payment is not mandatory and if fund houses deem fit, they may skip dividend announcement and payment. Post last budget, the dividend option of equity funds have become less efficient in terms of taxation as 10 per cent dividend distribution tax has been imposed. 

Dividend Reinvestment Option: This option provides many features that the dividend option and growth option funds have. Mutual funds where investors are given an option to reinvest the dividends they earn from the fund are dividend reinvestment funds. Fund manager’s use this money to buy more shares in the fund, which also increases the NAV of the fund. It is suitable for investors who invest in debt funds for a shorter duration and fall in the highest tax slab. As dividend reinvestment option will entail lower tax incidence on them.