While there are different types of investments available to an investor – equities, debt, money market instruments, hybrid, etc. depending on the type of securities the schemes invest in, mutual fund investments can offer varied options/plans within the same mutual fund scheme. Before investing in a particular mutual fund scheme, an investor needs to lay down the option and plan they wish to opt for their investment portfolio.
Regular vs direct plan
Direct plan does not involve any intermediate or middleman. This means that investors endowed with the right skillset and knowledge can consider opting for the direct plan for their investments. One of the benefits of direct plan is that these plans enjoy lower expense ratio than regular plans. Lower expense ratio means higher take home returns for an investor. On the other hand, in regular plans, there is a middleman involved who helps with professional management of the schemes on behalf on an investor. Commissions and distribution fees are factored in regular plans. Though regular plans involve higher expense ratio, a middleman can help invest in funds that has the potential to yield higher returns on investments.
Growth vs dividend
In growth option, the capital appreciation is added to the NAV of the mutual fund or net asset value of the fund. On the other hand, in the dividend option, the capital appreciation earned on investments is distributed to investors on a periodic basis in the form of dividends to investors. Investors looking for regular income might consider going forth with the dividend option. However, if you are looking for higher returns on your investments, you might consider the growth option as the power of compounding works in your favor.
Reinvestment vs dividend payout
Under the dividend payout model, the dividend which is declared by the company is paid to the investor in their bank account. On the other hand, under the dividend reinvestment model, the dividend is declared by the company, however, the amount is reinvested into the mutual fund scheme to earn higher returns as additional mutual fund units. Dividend payout option is often chosen by those investors who find dividend option more tax efficient and vice versa.
Things to consider as an investor before investing in mutual fund schemes
Before choosing the right mutual fund plan or option for your investment portfolio, you must consider the following things:
- Though the net asset value of varied mutual fund plans or options might be different, they form part of a single mutual fund scheme investment portfolio.
- Tax treatment under dividend reinvestment option and dividend growth option or dividend option and growth option might be different in the hands of the investor.
All in all, you must look for the tax implications of the mutual fund scheme chosen by you before you invest in these investment options. Also, ensure that your mutual fund investments are aligned with your investment duration, risk profile, and financial goals. Happy investing!
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