Some investors get into Mutual Funds because they want to create wealth over the long term. They start investing from the early part of their careers. Then there are investors approaching retirement or have a retirement corpus to invest that can supplement their other sources of income during the retired phase of life. Mutual Funds offer two options to suit these two contrasting investment needs.
A Growth option reinvests the profits made by the fund in its underlying securities to drive future growth and fund value. A growth plan has a higher NAV as profits from the securities are ploughed back into the scheme and the power of compounding comes into play.
A Dividend Plan distributes the profits made by the fund in the form of dividend income from time to time at the discretion of the fund manager. The dividend payout, though not guaranteed, can help supplement your income. In a dividend plan, the investor ends up with more units of the fund if he chooses a Dividend Reinvest option whereas he/she gets an additional source of income if he/she opts for a Dividend Payout option.
With effect from 1st Apr 2020, dividends have become taxable in the hands of investors. Now investors will need to pay tax on dividend income from Mutual Funds as per their highest income tax bracket.
While you can’t ignore the additional tax burden in the case of the dividend option, the decision to choose one option over the other should primarily be driven by your financial goals/requirements.