What are Mutual Funds?
A mutual fund is a professionally
managed fund where the savings from many investors are collectively invested as
one in various securities such as stock, bonds, short term money market instruments and commodities such as precious metals
having a common financial goal.
When we plan to invest in mutual
funds, the funds normally offers us 3 plans:-
- Growth Option
- Dividend Plan
- Dividend Reinvestment Plan
Growth
Plan: In
this plan, the fund does not payout anything to the investors by way of regular
payouts as all the profits of the fund are reinvested and therefore our wealth
increases. It increases the Net Asset
Value of the firm. In this case, the investor does not receive more
shares, but his shares of the fund increases in value.
Dividend
Plan: In
this plan, the dividend distributions made by the mutual fund are directly paid
to the shareholder. Dividend is directly swept into cash account or
electronically transferred to their bank account or through cheque.
Example for difference between
Growth and Dividend Plan
|
Particulars
|
A plan (Growth)
|
Particulars
|
A plan (Dividend)
|
|
NAV
of fund (01/01/2017)
|
Rs.150
|
NAV
of fund (01/01/2017)
|
Rs.150
|
|
NAV
as on 01/10/2017
|
Rs.170
|
NAV
as on 01/10/2017
|
Rs.170
|
|
Dividend
Paid
|
N.A
|
Dividend
Paid
|
Rs.17
|
|
NAV
Post Dividend
|
Rs.170
|
NAV
Post Dividend
|
Rs.163
|
|
NAV
in May 2018
|
Rs.190
|
NAV
in May 2018
|
Rs.185
|
|
Dividend
Paid
|
N.A
|
Dividend
Paid
|
Rs.18.5
|
|
NAV
Post Dividend
|
Rs.190
|
NAV
Post Dividend
|
Rs.166.5
|
|
Long Term
Capital Gain
|
Rs.40
|
Long Term
Capital Gain
|
Rs.16.5
|
Dividend
Reinvestment Plan: In
this plan, the dividends which are to be paid to their investors are used to
purchase more number of shares. It is automatically used by fund’s
administrators to buy more number of units on behalf of investors and transfer
them to individual’s account. It results in growing the value at a faster rate
than if dividends were not reinvested.
The main
difference between growth and dividend reinvestment plan is that in growth- NAV
increases whereas in reinvestment- No of shares or units would increase.
Thank You
Regards
Author- Ami Zatakia
Kautilya
IBS Mumbai
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