Investing and earning from mutual funds is a process that requires constant decision-making. It all starts with choosing the right mix of funds for your portfolio, after which you need to choose your investment strategy. In general, two strategies are widely used – growth and dividend investment.
Read on to know about each of the strategies and make an informed choice for your portfolio maintenance.
What is the growth investment strategy?
Under this investment style and strategy, the main focus is increasing the investor’s capital. As a result, if you use this stock-buying strategy, you will invest in companies, industries, or sectors that are growing at above-average rates and are expected to grow over a substantial time period. The dividend will not be distributed at the time of maturity but is reinvested in more stocks to maximize the NAV of the fund. This means no regular cashouts can be made with growth investing.
Consider an example – Suppose you purchase 100 units of an equity fund with a NAV of Rs. 50. Under the growth investment strategy, the NAV of the mutual fund increases to Rs. 60 in one year. The only way to get back profits in growth investing is to sell the units at the time of maturity. So, you sell, get Rs. 6,000 and your profit will be Rs. (6,000 – 5,000) = Rs. 1000.
What is the dividend investment strategy?
The dividend investment strategy is the exact opposite of growth investing. Under this style, the profits are not reinvested in the scheme but distributed among investors. You can choose to receive your dividend on a quarterly, half-yearly, or annual basis. The dividend is only declared when the fund generates profits. However, keep in mind that the scheme does not promise a specified frequency or amount for the dividend. Also, the NAV of the fund falls after the dividend has been distributed.
For example, suppose you invest Rs. 15 in an equity fund whose NAV increases to Rs. 20. The AMC can declare a dividend of Rs. 3, which will lower the NAV value from Rs. 20 to Rs. 17.
The two strategies are applicable for both lumpsum and SIP investments.
Which investment strategy should be your ideal?
Choosing between a growth and dividend investment strategy solely depends upon your investment needs. The dividend option is ideal during bullish markets when the NAV is expected to rise. This will increase the likelihood of funds declaring dividends. Also, if you need a regular source of income, the dividend option will work best.
However, the growth investment strategy is most suitable if you have a long-term investment horizon and do not need regular cashouts. The compounding of returns will help you build a solid retirement corpus or fulfill any other long-term needs.
You can switch from growth to dividend investing and vice-versa but remember that the process may involve exit loads and tax on capital gains, so make an informed choice early on. To simplify your investment journey, download smartphone apps such as the Moneyfy app. Create an account, complete a simple KYC process, pick your investment type using the MF scanner, browse through different funds, build a strong portfolio, and invest in mutual funds online.