Imagine you’ve booked an 8 am flight from Bengaluru to Chennai on FlyIndia Airlines. You realise that the wrong flight was booked and needs rescheduling. What kind of charges do you think FlyIndia will charge you? You will have to pay a penalty for changing your mind even though it is the same airline, same date of travel, same destination and the same passenger!
In case of Mutual Fund investments, switching your investments from one option to another within the same scheme is considered as a sale (redemption). Hence, the switch will attract exit load and capital gains tax depending on how long you had invested.
The two options within the same scheme have different NAVs and operate differently.
- Growth option reinvests profits made by the funds allowing you to benefit from the power of compounding and is more suitable for long-term wealth creation.
- Dividend option shares the profit made by the fund among its investors. This option is suitable only for those seeking regular income from their Mutual Fund investments.
If you feel the need to change from the dividend to growth options or vice versa , check if an exit load or Capital Gains tax is applicable.