A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment company in the UK.
What should investors consider when switching from Dividend to Growth?
Imagine you booked a flight at 8am from Bengaluru to Chennai on FlyIndia Airlines. You realize that the wrong flight has been booked and needs a rescheduling. What kind of fees do you think FlyIndia will charge you? You will have to pay a penalty to change your mind even if it is the same airline, the same travel date, the same destination and the same passenger!
In the case of investments
in mutual funds, the transfer of investments from one option to another within the same scheme is considered a sale (drafting). Then, the switch will attract tax on the exit load and capital gains depending on how much time you have invested.
The two options within the same scheme have different NAVs and work differently.
- The growth option reinvests the profits made by the funds allowing you to benefit from the power of composition and is better suited to long-term wealth creation.
- The dividend option shares the profit made by the fund among its investors. This option is suitable only for those who seek a regular income from their investments in mutual funds.
If you feel the need to switch from dividend to growth options or vice versa, check if an exit charge or capital gains tax is applicable.