Growth Option

Mutual Funds provide different options to investors which they can choose depending on their financial requirement. A Growth Option focuses on long-term growth of capital. In case of the growth option, you choose not to opt for dividends.

Thus, if you invest in the growth option of a Mutual Fund scheme, you will not receive any intermediate payouts from the scheme. In a growth option, all profits made by the fund are reinvested into the scheme. This leads to an increase in the NAV of the scheme, since the profit is retained by the scheme instead of being distributed to the investors. When the scheme makes a profit, NAV of the scheme increases and vice-versa.

The only way an investor in a growth plan can realise profit is to sell his/her investment in the scheme. The return in a growth plan is calculated by taking the difference in NAV on the sale date and purchase date as there are no intermediate payments like dividends, interests, gains, bonus, etc.

A growth option investor experiences a higher capital gain at the time of redemption as compared to an investor who has opted for dividend option. Thus, the growth option investor will end up paying higher capital gains tax as compared to the dividend option investor for the same duration of investment. However, the dividend option investor has to bear the impact of Dividend Distribution Tax (DDT) which is the tax the fund house deducts from the dividend to be paid out. Since a DDT is deducted every time the scheme announces a dividend, this reduces the amount of money available for future reinvestment in case of a Dividend Reinvest option as compared to a Growth option where capital gain tax is levied only at the time of withdrawal. The DDT also reduces the dividend being received by the investor who has opted for Dividend Payout option.

A growth plan is suitable for those who are looking for the growth of their capital over the long-term and don’t look forward to intermediate payouts from the fund.