Why does Scripbox always recommend the growth option over the dividend option of a mutual fund?
In the Growth option of a mutual fund, you realise returns only when you sell your units. You don’t receive any payments, interest or dividend in the interm. The NAV grows as the fund performs over time. In the Dividend option of a mutual fund, you will get periodic returns at different intervals. The intervals and dividend amount are not certain or fixed. The NAV doesn’t go up, and when it does, you get a dividend.
The Growth option is better because:
- Compounding: The Growth option makes sure that gains are reinvested so your money grows at a faster rate (with time) as the fund performs better. So money invested today in growth option grows more, the longer it is in a good fund. The effect is cumulative. Imagine a snowball rolling down the hill – the more it travels, the bigger it grows.
- Tax treatment: When you invest in Growth option, the gains are treated under something called capital gains. Long-term capital gains is taxed at 10% for holding period more than 1 year, on gains more than Rs 1 lakh. This advantage is not available for the Dividend option.