Growth vs Dividend Reinvestment: Which Option Is Better? | 5paisa (2024)

Assumingly, you have started your investment journey with certain financial goals. So, understanding the difference between growth vs dividend reinvestment is quite imperative for you.

Thus, the ones who want capital gain prefer the growth option. Note that it helps you reinvest your profits to maximise your returns. On the other hand, investors who prioritise income streams would prefer the Dividend Reinvestment Option. Notably, this one lets dividends compound with the help of additional units.

So, as a budding investor, understanding the options is critical. Note that it helps you align your investment strategies with individual financial goals and risk tolerance. At the same time, it helps you with tax planning requirements too.

However, choosing between dividend and growth reinvestment options is pretty confusing, especially for investors who have started navigating the world of mutual funds.

Truth be told, the growth option involves reinvesting profits back into a fund. So, it fosters capital appreciation. On the contrary, a dividend reinvestment option reinvests your earnings back into your fund. So, it simply adds more shares to your holdings.

So, comprehending the complexities of these two options is important. Note that it helps you implement the right investing tactics. Welcome to this all-encompassing post that narrates everything about growth options and dividend reinvestment options. Let's find out more details on growth vs dividend reinvestment from the below-offered points:

What is the Growth Option?

Want to learn about growth vs dividend reinvestment? If yes, you must first learn what is the growth option.

First things first, the growth option in mutual funds gives you a great opportunity to maximise your capital appreciation. Here, you can reinvest your profits back into your fund. Note that the dividend reinvestment option distributes earnings as the additional shares.

However, this option helps compound without getting an immediate payout. So, this method is more appropriate for people who prefer long-term wealth creation. It's best for the ones for whom obtaining monthly income distribution is not a priority.

So, reinvesting dividends in the growth option helps you grow the initial capital. Thus, you may get higher returns on your investments in the future. But one thing you should always remember here is that taxes on gains occur after you sell the share.

So, this option is not a great choice for investors who want regular cash payouts from investments. Nonetheless, a net asset value of your mutual fund will increase even when the units is unchanged. Thus, you can get an opportunity to generate more returns with the same units if you select this option.

What is a Reinvestment Option?

Let's understand a reinvestment option before understanding growth vs dividend reinvestment. So, the reinvestment option is the next one that helps investors automatically reinvest dividends or capital gains earned from investments back into their funds. Here, you wouldn't receive the earnings as cash payouts. However, the reinvestment option converts the earnings into additional shares.

So, this particular approach is for investors seeking to compound their wealth. Note that it can help you reinvest the returns and benefit from compounding. Reinventing capital gains and dividends helps investors accelerate their investment portfolio and growth. Here, the best part is that it does not require any additional capital.

What are Differences Between Growth and Dividend Reinvestment Options

So, have you considered the new income tax regulations? Well, dividends received from the mutual fund as of April 1, 2020, are taxable for investors considering their tax slab.

Suppose you reinvest dividends in the mutual fund scheme. In such a circ*mstance, the income tax rules will remain unchanged. Your income tax agency views the dividends as income. So, you can pay taxes on them when you do not even receive the payout in your account.

Considering this, you pay around 30% in taxes on profits that you declare if you are in a 30% tax slab. Thus, that will lower the mutual fund returns. Besides, dividends paid by mutual fund schemes will be subject to 10% of TDS in case the amount exceeds Rs. 5,000.

So, that means the TDS applied to the payout will be reinvested. So, the investment will be of a lesser value in that case.

Notably, the following differences give you an insight into direct growth vs direct dividend reinvestment:

From the table mentioned above, it is clear that:

Dividends are reinvested into the fund to allow for compounding returns in the growth options. No dividends will be distributed so it offers better long-term benefits. Note that investors can reinvest dividends into the same fund. Evidently, dividend reinvestment seems to be a better solution for investors seeking regular income.

Simply put, you won't get a universal investment solution. So, the choice of a mutual fund growth option dividend reinvestment option entirely depends on individual needs. Truth be told, the growth options can benefit long-term investors. Nonetheless, investors who want to receive regular payouts prefer the dividend reinvestment option.

So, you must consider a few parameters to avoid investing in a fund that does not suit your requirements. That's how you can better invest in the mutual fund. Now you know the differences growth vs dividend reinvestment, so it's easier to select one that meets your financial needs.