Should I choose mutual fund schemes that provide dividends from time to time? How are they different from dividends received directly from shares?
—Devagya Pal
Mutual fund schemes typically come in two variants, or ‘options’. There is the growth option and a dividend option.
With the growth option, whenever a scheme’s investments make profits, the profits are either simply allowed to grow or are plowed back into the scheme’s portfolio. Consequently, the net asset value (NAV) of the growth option of a scheme will simply move with the change in the underlying value of the portfolio.
With the dividend option, however, the fund manager has the discretion to ‘book’ profits from the investments and distribute it to the investors in the form of cash. In this case, the NAV of the scheme will keep changing with the underlying value of the portfolio until a dividend is distributed, upon which time the NAV will fall in proportion to the distributed amount.
