Its always a difficult choice when asked to choose between Growth Option Vs Dividend Option while investing in mutual funds. Most of the experts and advisers suggest to opt for Growth Option. The reason given for that is to use the “power of compounding”. However, I would differ with all these.
I would go for a third option “Dividend Reinvestment”. There are few reasons for this to be a better option than the Growth Option Vs Dividend Option. It gives the returns very very close to the Growth Option, but the advantages of dividend option are also there.
The first reason i prefer this is more to do with Psychology. An investment gives more happiness, if there is a visible activity. In a dividend option, this desire is fulfilled. In growth option, you see the change in the net worth. However, in a dividend reinvestment, you see the change in amount invested. This is chiefly due to the fact that you are given the dividend and the same is used to purchase more units. This gives a feeling of activity in your investment. You see a statement which talks about changes and new investments which gives a feel good factor.
The second reason is ease of changes in options. In case of Dividend reinvestment, you can always opt for changes between payout and reinvest. If you want a regular income generated from your investments, the option can be changed quickly without much hassles. In case of growth option, you need to either sell and buy again or opt for switch. Remember to calculate the exist loads as applicable.
Finally the tax treatment. In case of dividend reinvestment, the dividends are tax free in the hands of investors. (AMC pays the dividend distribution task). But in case of Growth, entire growth is taxable under L/STCG as applicable. But in case of dividend, your investment is increasing (notionally -remember that your are not paying) and the return calculation for the purpose of tax is much less.
In consideraion of these, I would always go for a Dividend reinvestment plan only