Quantum of market dependent dividend is not guaranteed

From an investor’s perspective, unless one is looking for regular income or cash flow from a mutual fund investment, it is best to go with the growth option and keep generating gains to the capital invested


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What is the difference between growth, dividend and reinvestment plans?

—Chayan Sharma

The options that you refer to in terms of growth, dividend payout, and dividend reinvestment are all choices offered to investors by mutual fund schemes in terms of how the profits generated by the scheme should be handled. Mutual fund schemes invest the money collected from investors, and deploy them in different markets such as the stock and bond market. Hopefully, these investments grow and make profits in the fund’s portfolio.

The fund manager can take these profits and make further investments, or these profits can be given back to investors (at least a part of it) periodically.

If the investor has chosen a dividend option, whenever the fund manager decides to distribute profits, they will be issued to the unit holders (investors) as dividends. If growth option is chosen, the profits will be retained in the portfolio and reinvested as per the manager’s discretion. In dividend payout option, the distributed dividend will be deposited in the investor’s bank account, and in the dividend reinvestment option, the money will be reinvested (in the form of purchase of additional units) in the same scheme. So, the money will make a round-trip back into the fund’s portfolio in a different form.

As one can see, there is little practical difference between the growth option and the dividend reinvestment option.

From an investor’s perspective, unless one is looking for regular income or cash flow from a mutual fund investment, it is best to go with the growth option and keep generating gains to the capital invested. Also, one should note that with equity funds, dividend declarations can be sporadic and unpredictable since it would be market dependent. Debt funds are better at sticking to a schedule of dividends. In either case, the quantum of dividend issued is not guaranteed.

What happens if I miss my systematic investment plan (SIP) payments for two months?

—Tarush Ratna

An SIP allows an investor to make periodic (typically monthly) investments in a mutual fund scheme by automatic debits from a bank account. The purpose of an SIP is to ensure a disciplined and effortless investment on the part of an investor on a regular basis. Missing SIP payments should thus be avoided as much as possible.

However, in case of financial exigencies, if one is not able to make the payments for a month or two, the mutual fund company will not impose any penalty or stop the SIP. But one must note here that in most cases, the bank that processes the SIP debit request from the mutual fund company will impose a penalty on the customer (you) for not having sufficient funds.

Apart from missing the market opportunity that comes from making regular investments, this is one more reason to try and not miss SIP payments.

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