Sunday, July 15, 2007

Mutual Funds for you: Difference between dividend plan and growth plan in a mutual fund scheme

A lot of us who want to invest are ready to take the mutual fund route thanks to the never-ending reporting of stock market performance by the media. Many companies are in the MF business and each has several schemes on offer. Adding to the confusion, the MF agent may ask you if you want the dividend plan or the growth plan in the mutual fund scheme you finally select.

But what is the difference between dividend plan and growth plan in a mutual fund scheme? Many including the MF agents and staff, are not clear on this due to inexperience or lack of information. So, let us find out for sure.

First the basics: A mutual fund collects money from investors and pools it together to form the initial corpus for the scheme. This in turn, is used to invest in the stock markets, corporate debt, or the money market depending on the scheme's style of investing. A portion of the corpus may be retained as cash. Note that the different schemes launched by a fund house keep their monies separate.

Now, as expected, the market value of the fund's investments keeps fluctuating.

The market value derived above is added to the cash available with the fund. The total is divided by the number of units issued by the fund. This value per unit is nothing but the NAV publicly declared by the fund.

Growth Plan: The NAV changes as per the market value of the underlying investments.

Dividend Plan: The NAV changes as per the market value of the underlying investments. When a dividend is declared, the amount is paid out of the fund's cash reserves for those who have opted for dividend payout. Some investments may be sold for meeting this cash outgo. The NAV of the scheme gets reduced by the actual amount of dividend paid per unit. In the case of those investors who have opted for dividend re-investment, there is no cash outgo for the fund. The dividend amount is reinvested in the fund by dividing it by the NAV as on dividend declaration date. The resulting number of units are added to the investors' holding.

So, coming back to the question of choosing between dividend and growth plan options: there is no value advantage to be gained by choosing any one option over the other. This is due to the fact that your choice is all about how the profits earned by the fund are distributed to you. It's not about making more money by choosing either plan. If you opt for Growth, your profits are in the rising NAVs whereas in Dividend, they lie in cash paid to you or addition to the number of units in your portfolio. In any case the profits, or losses, remain the same.

So, there you are :)

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