Which fund type to invest in? What is the risk-return ratio you wish to maintain? How long is the time period within which they are willing to put their money in the mutual fund? How much should i invest in mutual funds?.
In addition to these, there is one other crucial decision that investors have to take when making mutual fund investment decision – deciding the investment type.
Choosing the right investment type helps investors estimate the amount they should put in mutual funds and also helpsthem get a probable return value.
When we talk about the investment type, there are three types that commonly confuse the investors – Dividend Re-Investment, Dividend Payout, and Growth. All three of them come with their share of considerations, objectives, and tax implications.
In this article, we will be looking all the three investment choices and help investors make a calculated decision of which type they should invest in.
Let us start with explaining the meaning or context of each of the investment types.
- Growth
In case of the growth investment option, the Net Asset Value grows alongside the share prices, which leads to capital appreciation. This option is well suited for the investors who are looking for long-term capital appreciation.
Suppose the fund comes with 1,000 units and the NAV is Rs.10. So the whole fund size would be Rs.10,000. Now, if the NAV grows to Rs.14. In a year, the size of the fund would increase to Rs.14,000, which would then result in Rs.4,000 capital appreciation.
- Dividend Pay Out
Under this investment type, a part of profits that are made by the mutual fund is paid back to investors in the form of dividends and the NAV is adjusted to the payout of post-dividend amount. This investment type is best for the investors who are looking for a continuous income inflow.
Imagine a fund has 1,000 units and the NAV is Rs.10, making the fund size Rs.10,000. Now after 1 year when the NAV increases to Rs.18 and a dividend is announced at Rs.4 per mutual fund unit, then Rs.4,000 will be given to the dividend and the NAV will get adjusted to Rs.14.
- Divided Re-Investment
In this investment type, dividend gets declared but is not paid to the investors. What happens is that the investors are asked to buy more mutual funds that can be purchased with dividend and the NAV gets adjusted to that specific extent.
Suppose a mutual has somewhere around 1,000 units and NAV is of Rs.10, making the fund size Rs.10,000. Now after a year when the NAV increases to Rs.18, the Rs.4 dividend would come out to be Rs.4,000 and NAV will be adjusted according to Rs.14.
All the new units, which equates to Rs.286 will be created and then get issued to the investors.
Now that we have looked at the meaning of all the different mutual fund investment types, it is time to give you an answer to which investment type should you opt for out of these three.
Well, the answer to this would lie in your requirement.
If you need regular income coming in your bank account in line with the invested mutual fund amount, go with dividend pay out. If you wish to keep the money in for steady growth over a period of time, opt for Growth option and if you are looking for a risk backed high return mode of investment, go with Dividend re-investment.
So, in the end, there is no fixed answer to which investment type you should invest in. It would ultimately depend on how comfortable with having an amount of money coming in your bank account on a regular basis vis-a-vis keeping them in the mutual fund house.
We hope that the difference that we told you would help you take an informed decision. If you still have a lingering doubt on which investment type to put money in, get in touch with our team of mutual fund experts.
