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Investing in an MF? Choose the right plan!

May 28, 2009 10:11 IST

Looking to invest in mutual fund but don't know which mutual fund plan to go for? Are you confused by the recommendations given by various investment advisors about which mutual fund plan to select?

Don't worry. Here we cover the different mutual fund plans and how to choose the one that will help you benefit.

Different mutual fund plans

Every mutual fund scheme offers 3 types of plans. They are:

Dividend plan: The investors opting for the dividend plan get dividend whenever the mutual fund declares dividend in the particular scheme. As a result, NAV of the fund falls by the amount of dividend declared. For example, if the NAV of the fund is Rs 100 and the fund house declares a dividend of Rs 10 per unit, then the NAV of the fund will go down by Rs 10, i.e. new NAV becomes Rs 90.

Growth plan: In growth plan, the investor does not get any dividend. Rather the NAV goes on increasing, generating capital appreciation. For example, if you have invested Rs 100 in a fund, whose NAV is Rs 50, you are allotted 2 units of the scheme. In the growth plan, if the NAV appreciates to Rs 60, the worth of these 2 units would be Rs 120. So while the number of units remains the same, the worth of your investment has gone up. The only way you can benefit from this increase is by redeeming your investment.

Dividend reinvestment: If you want to buy more units of the mutual fund scheme without paying for them, then dividend reinvestment is for you.

Mutual funds let you choose between taking the dividend or reinvesting it. If you select this option, the dividend is reinvested into the fund to purchase more units. As a result, the number of units you possess will increase. This doesn't happen in either growth or dividend option.

Factors affecting the choice of plan:

Are you looking for income? Do you want to ensure your investments provide you with regular income? If so, then opt for dividend option. It will also help you book profits and thus protecting your investment from a sharp fall, caused by market crash.

On the other hand, if you are saving for some future long term goal like retirement planning, always remember growth plan is ideal for you. Want to purchase more units of the fund but don't want to put your own money? Then let mutual fund pay for your purchase, by opting for dividend reinvestment plan.

Ultimately, which plan you will choose will be decided by your specific condition and your goal. Remember dividends from the mutual funds are not guaranteed.

So if you are depending on mutual fund dividends for regular income, you will be disappointed as these are not assured.

Similarly if you think growth plan will keep your capital appreciating for good, it is not true. A sharp stock market crash can wipe out any increase in capital. So always consider these factors before deciding which plan to choose.

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