Difference Between Growth vs Dividend Mutual Funds

difference between growth funds and dividend funds

Investment is full of choices and confusion, and the most pivotal decision is between growth and dividend mutual funds. Both serve different financial purposes, and knowing each type of investment is essential.

This article will explore the core differences between dividend and growth mutual funds and their pros and cons. By the end of the article, you can decide which mutual fund suits your investment the best.

Table of Contents

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What are Growth Funds?

Growth funds are a group of mutual funds that focus on investing in equities of companies believed to have high growth. These funds suit investors willing to accept more market risks as long as they can get excellent returns over a long-term horizon. Thus, they are highly suitable for long-term plans.

Unlike income-oriented funds, growth funds do not disburse dividends. Instead, they focus on maximising the fund's net asset value (NAV), which is increased by reinvesting dividends into the business or company. These funds have an equity focus and are subsequently more volatile but give higher returns.

What are Dividend Funds?

Dividend funds are mutual funds that pay investors dividends from their earnings. These distributions come from the fund's income, such as a stock dividend or bond interest. Dividend funds are excellent for investors who need regular income and capital preservation, especially during volatile markets.

However, dividend payouts will be subject to the fund's performance and market conditions. Furthermore, with every payout, the NAV declines, reducing potential capital appreciation. Despite all these facts, these funds are in high demand by conservative investors who want a steady return and liquidity.

Key Differences Between Growth and Dividend Mutual Funds

Growth and dividend mutual funds are two popular investment options. Yet, each fulfils different financial goals. The table below depicts the differences between the two:

Parameter Growth Mutual Funds Dividend Mutual Funds
Goal Maximises wealth by reinvesting profits into the fund, focusing on long-term capital appreciation. Provides regular payouts from fund earnings, offering cash inflows through dividends or interest.
Returns Returns are reflected in a steadily rising NAV due to the reinvestment of income, meaning no direct cash payout. Cash payouts are made periodically, which reduces the NAV. Returns depend on market conditions and fund performance.
Investor Suitability Best for long-term wealth creation and is ideal for investors who don't need immediate income. Suitable for retirees or conservative investors seeking consistent income and liquidity.
Tax Implications The taxation of both STCG and LTCG depends on the holding period for each of them. Dividends will be taxed according to the income level slab, which may increase tax liability. Higher-income investors will receive lower post-tax returns.
NAV Impact Reinvesting profit has a compounding effect that supports long-term growth and gradually increases the NAV. The NAV is knocked down with each dividend payment, and thus, the growth is hampered since the profit is paid out instead of reinvested. 
Risk Appetite Suitable for aggressive investors seeking higher returns. Offers significant growth potential in favourable market conditions. Ideal for conservative investors seeking reliable income. Regular payouts provide financial stability.
Liquidity The investment option is relatively less liquid due to the absence of regular payouts, requiring investors to sell units to access their funds. Offers better liquidity as it provides consistent distributions that ensure cash flow for any instantaneous cash needs.
Reinvestment Option Profits are automatically reinvested, creating compounding benefits that enhance wealth over time. Investors can reinvest dividends manually, but this doesn't generate the same compounding effect as in growth funds. 
Market Dependency The NAV fluctuates with market appreciation and fund performance, making it highly volatile. Payouts depend on market conditions and fund performance. Payouts may be lower or stop in poor conditions.
Fund Manager's Profits Fund managers earn fees based on NAV growth. The higher the growth, the better the fees. Fund managers earn flat fees based on total assets under management (AUM). Payouts lower the NAV, often leading to reduced fees.

Types of Growth Funds

Depending upon the capitalisation of underlying stocks, various subcategories of growth funds exist. Here's a breakdown of the different types of growth funds:

Type of Fund Description
Large-cap Growth Funds These are invested in well-established companies with a huge market capitalization, typically exceeding ₹10,000 crores. The businesses usually are market leaders and have successfully held onto this position, thereby showing prolific growth. It's less risky than investing in smaller companies.
Mid-cap Growth Funds This type of investment is on companies whose market capitalisation falls between ₹2,000 and ₹5,000 crores. Companies in the growth phase generate higher growth than large-capital companies. However, they are relatively riskier than the latter.
Small-cap Growth Funds Such funds target small companies with a market capitalization of less than ₹2,000 crores. Small-cap growth funds emphasise large growth opportunities. Due to the company's growth stage, such funds tend to be more volatile and riskier. 
Sector-specific Growth Funds These funds concentrate on investments in specific industries, such as technology or healthcare. They focus on high-growth sectors to capitalise on industry-specific trends, which fetch higher returns with higher risks.

Types of Dividend Options in Mutual Funds

Mutual funds offer dividend options that provide periodic income or allow earnings to be reinvested. Investors can select any of the two options based on their financial goals, including:

Type Description
Dividend Payout Investors receive dividends as cash directly deposited into their bank accounts. This option is suited for those seeking regular income to satisfy their short-term financial needs. However, it reduces the fund's Net Asset Value (NAV).
Dividend Reinvestment Dividends are reinvested to buy more units of the same fund. This option maximises growth in the long term by compounding. It suits investors whose key investment objective is capital appreciation. However, the same would be subject to market risks.

Growth Fund or Dividend Fund: Which is Better for You?

The choice between a growth fund and a dividend fund depends on the investor's financial objectives, risk, and the urgency of income generation.

1. Investment Focus

Growth funds invest earnings to compound wealth. Therefore, they are ideal for long-term investors with an eye on capital growth. Dividend funds distribute earnings as dividends. These offer income that can be reinvested.

2. Risk and Return Possibility

Growth funds have more potential for returns but have the risk attached. They can be known to bring more profit during long-term investment. Dividend funds bring stability, but payments rely on market emotions.

3. Investor Suitability

Growth funds are suited for the aggressive investor who needs more return but can accept a higher level of risk. Dividend funds would be appropriate only for the more conservative investors.

4. Tax Considerations

Growth funds generally produce long-term capital gains, which are taxed long-term. This makes them tax-efficient for many investors. Dividend funds often have dividends taxed at a higher rate.

5. Liquidity and Flexibility

Growth funds are flexible because their shareholders can sell off shares to realise gains. So, they are more liquid than the others. Dividend funds are also liquid, but their flexibility may differ from the rest.

The choice of the category of funds should go with the attributes of investors. Growth funds carry out the cycle of investment and reinvestment to gain long-term wealth. A dividend fund offers stability for your investment and enables you to get periodic income. Ultimately, opting for one would depend on what's important for your financial goals.

Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.

We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.

FAQs about Growth vs Dividend Mutual Fund

Can I switch from a dividend to a growth fund under the same scheme?

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Yes, most mutual funds allow you to switch from growth to dividend and vice versa. However, depending on the holding period, such a switch may have an exit load and attract tax.

How are the NAVs of dividend and growth funds in the same scheme different?

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In the same scheme, growth funds reinvest profits, increasing the NAV. However, dividend funds pay profits as dividends, lowering the NAV. This makes the NAVs of dividend and growth funds in the same scheme different.

Do growth funds outperform dividend funds in the long run?

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Yes, growth funds usually do better than dividend funds over the long run because of compounding. However, performance depends on market conditions and the fund's underlying assets.

What happens to dividends in a growth fund?

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Any profit in a growth fund, including any potential dividend, is reinvested in the fund, which would increase the NAV.

Are dividend reinvestment plans the same as growth funds?

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No, dividend reinvestment plans allow dividends to be reinvested to buy extra units. However, the NAV reset after payouts can limit compounding compared to growth funds.

Which is more tax efficient, growth or dividend fund?

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Growth funds are typically more tax-efficient for long-term investors. They have lower taxation on long-term capital gains than dividends taxed at the income slab.

Can dividend funds give consistent income during a market downturn?

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Dividend payouts would go down in the falling markets. This is because they depend on performance, which is unpredictable under such conditions.

Are growth funds riskier than dividend funds?

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Growth funds can appear riskier when the market fluctuates. However, the actual risk is based on the fund's portfolio and investment strategy.

Are dividend funds suitable for short-term investors?

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Yes, dividend funds can be suitable for short-term investors who expect periodic income without waiting to see if capital appreciation ever occurs.

How do growth and dividend funds affect the diversification of a portfolio?

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Growth funds represent long-term appreciation vehicles for an equity-heavy portfolio. However, dividend funds provide stable income and balance higher-risk investments.

Should retirees choose dividend funds over growth funds?

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Retirees can prefer dividend funds for regular income. Yet, those with large savings and a longer horizon should opt for growth funds.

Which is better, the growth fund or a dividend fund?

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The choice depends on your financial goals. Growth funds are more suitable for long-term capital appreciation, while dividend funds are best suited for regular income.

What is the difference between a dividend and a growth fund?

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A growth fund focuses on generating value from an investment through profit reinvestment, while a dividend fund gives frequent returns from profit to the investors.

Other Important Articles about Mutual Funds

What is Growth Mutual Fund?
CAGR vs Absolute Return
What is Interval Fund?
What is Mutual Fund?
ETF vs Index Funds
What is Lock in Period in Mutual Fund?
What is Systematic Investment Plan(SIP)?
Types of Mutual Funds in India
Arbitrage Fund vs Liquid Funds
Flexi Cap vs Multi Cap Funds
How Mutual Funds are Taxed?
What are Arbitrage Funds?
Gold Mutual Fund vs Gold ETF
What are Debt Funds?
What is Equity Fund?
IDCW vs Growth
What is Hybrid Fund?
Types of Mutual Fund Returns in India
What is Statutory Liquidity Ratio?
What is Index Fund?
Open Ended Fund vs Closed Ended Fund
What are Multi Cap Mutual Funds?
SIP vs Mutual Funds
What is Income Fund?
Sharpe Ratio vs Treynor Ratio
What is International Fund?
Direct vs Regular Mutual Funds
Index Funds vs Mutual Funds
IDCW vs SWP
What are Corporate Bond Funds?
Difference Between Smallcase and Mutual Funds
Value Funds vs Growth Funds
SIP vs PPF
Mutual Fund Charges or Fees
XIRR vs CAGR
What is Money Market Fund?
ETF vs Mutual Funds
What is XIRR in Mutual Fund?
Fixed Deposit vs Mutual Funds
What are Leveraged Funds?
Liquid Funds vs Debt Funds
Active Funds vs Passive Funds
What is Lumpsum in Mutual Fund?
What are Commodity Mutual Funds?
NPS vs Mutual Funds
Sharpe Ratio vs Sortino Ratio
Bonds vs Mutual Funds
ELSS vs SIP
Balanced Funds vs Equity Funds
Mutual Fund vs Life Insurance
What is Exchange Traded Fund?
Equity Funds vs Debt Funds
Growth Fund vs Dividend Fund
What are Sectoral Funds?
PPF vs Mutual Funds
SIP vs Lumpsum in Mutual Funds
ETF vs FOF
What is ELSS?
What is Capital Protection Fund?
Annualised Return vs Absolute Return
SIP vs RD
What is a Balanced Fund?
Mutual Funds vs Stocks
Mutual Funds vs Hedge Funds

Disclaimer

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  • This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
  • All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
  • Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.

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