The investor is spoilt for choice:
It happens often that when an investor is still reading and deliberating and trying to find out for himself what kind of investment in mutual funds he is looking out for that he is bound to get carried away by the sheer number of options that he has at his disposal. So, while it is one of the main reasons why people across the industries flock to invest their money in mutual funds, it is also a big reason why such people are always confused what option to choose for themselves or even if the option that they have chosen is the right one for them.
To opt for a growth fund or a dividend reinvestment fund?
The biggest dilemma that people nowadays feel is whether they should invest in a fund that has the growth option or a fund that allows for dividend reinvestment into the fund. It is the right thing to say that both of the approaches have their own set of advantages and disadvantage. What then can be a determinant is what the investor knows what will be most ideal scheme for him that will it help him realize the financial gains that he is looking to make.
What do the two options mean in brief?
- The growth option for mutual funds:
A lot of companies where the funds are invested call out dividends. When an investor decides to opt for a growth fund, the dividend automatically gets added to the existing fund and increases the Net Asset Value of the fund. In this case, also the number of shares does not increase per se but the value of the holding increases.
- Dividend reinvestment mutual funds:
This is mostly offered as a free service by the mutual fund companies. In this case, the dividends are not really paid out in cash to the investor but they are reinvested in other companies. In this option, the number of the shareholding of the person increases.
At any point in time, however, the investor can opt out of the above two options and ask for a payment of dividend into his account. The following three methods are generally used by the MF companies in paying out the investor his dividends if he chooses to:
- Directly paid into the shareholder’s account;
- Electronically transferred to his account and
- Sent physically via mailers as a cheque to the address furnished by the investor himself.
What is the bottom line?
In the end, it is noteworthy to say that there is no mutual fund that is perfect. A mutual fund that is best to the investor’s present financial status and meets his future medium and long-term goals is what he must look at in order to choose what will be best for him in the long run.