Growth, Dividend of Equity Mutual Funds
In this edition of the Minutia, we would be looking at the options we would have in Equity Mutual Funds
Before we proceed into the details of the options we have in Equity Mutual fund, I would suggest you read the previous edition of the Minutia newsletter to understand how the Equity mutual funds are classified. Follow the link below.
Typically, we will find 3 options in an equity fund. Growth, Dividend, and Dividend reinvestment options. These are a result of what you do with the profits of your mutual fund.
If you choose to not take the profits but stay invested for long term, then you should opt for growth. With growth, you are taking advantage of the compounding over several years. A mutual fund which lets you stay invested as long as you wish and book the profits is a Growth Mutual fund.
In growth mutual fund, your investments are rising with the market over a period of time.
Companies sometimes shares the profits earned by the company with its investors. When you opt in to take the dividends offered by the companies in which your mutual fund has invested, then you are in a dividend mutual fund.
We can choose to invest this dividend in the same mutual funds, when you opt in to reinvestment the dividends received, then that mutual fund is a dividend reinvestment mutual fund. The mutual fund house will take the dividends offered by the company and with those dividends, it will buy the shares/stocks again at that particular market price.
As a conclusion, If you are willing to stay longer in investment journey, wants to compound over a long term period and wants to make more profits by reinvesting the profits made(dividend), then opt for mutual fund which has Growth and Dividend reinvestment options.
If you are near your retirement or retired and needs to book profits then opt for the mutual fund which will offer you to have the dividend pay out option.
To have a complete understanding of equity mutual funds, let’s also look at the two other varieties of equity mutual funds.
Hybrid funds
Hybrid mutual funds are when a mutual fund has a certain amount of exposure to equity but not as a whole. Hybrid funds are also called as balanced funds since these funds have two or more type of financial investments.
Hybrid funds can be further divided into three categories, namely, conservative fund, balanced fund and aggressive fund.
Conservative fund has 10-25 percentage of equity, while the other percentage would be in debt investments or other investments. Balanced fund has 40-60 percentage in equity. Aggressive fund has 65-80 percentage in equity.
These funds are to provide more return than a debt mutual fund. These might be less risky than the full-pledged equity mutual funds, but the income is not as assured as a debt mutual fund.
So if you don’t want to lose money, and you want to expose yourself to equity to a minimal extent, then Hybrid funds are the way to go.
ELSS
ELSS, Equity linked savings scheme, are self-explanatory. It is a savings scheme like the PF (Public Provident Fund) or the EPF (Employee Provident Fund) but it is linking to equity, so that the return is more than the other savings scheme.
To sum it up, you should buy a growth, dividend reinvestment, equity mutual fund if you want to make more profit while willing to take the higher risk by staying invested for a long period of time to compound your profits over several years.
If you are near your retirement age, then investing in Dividend Mutual fund makes sense. If you need assured income but can afford a slight amount of risk for profit, then invest in hybrid mutual funds.
Until next time,
Peace out!