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Equity Funds Vs Dividend Funds: Which Mutual Fund Scheme Is Better?

Equity Mutual Funds are appropriate for long-term capital growth (6-7 years or more). Over longer time periods, equity funds have historically delivered higher returns as compared to other assets like fixed deposits, public provident fund, debt mutual funds, etc. Additionally, a fund with growth option helps the investor get the benefit of compounding, whereby gains made on the principal amount stay invested, which helps the investment to grow further. In a dividend option, gains made on the principal amount are distributed to the investor. The total amount that remains invested and lasts to grow gets decreased by the sum of dividend paid, which results in the investment corpus growing at a below potential return.

equity mutual funds

For example, if an investor had invested Rs 1 lakh in S&P BSE Sensex on January 1, 1998 and did not withdraw any money in between, then it would had sprouted to Rs 13 lakh by December 31, 2017. On the other hand, if the investor had withdrawn Rs 5,000 every year (like a dividend option) from the investment, then by December 31, 2017 the investor’s corpus would be Rs 8.9 lakh (including Rs 1 lakh withdrawn between 1998 and 2017). Hence, unless a regular stream of income is required, an equity fund with growth option is desirable over dividend option.

When Do Fund Houses Deduct Their Charges For The Year?

Asset Management Companies (AMC) charge investors for professional management of the fund and to meet regular operational costs. As the fund size grows, fees levied on the scheme reduces as per the slab mentioned in the Scheme Information Document. The aggregate expense that the scheme can cost to the investor has an upper limit. This upper limit is governed by Sebi norms and is mentioned in terms of “percentage of daily net assets of the scheme”.

Dividend mutual funds

Within the total recurring outlays charged to the scheme by the AMC, known as Total Expense Ratio (TER), investment management and advisory fee is charged as a percentage of daily net assets and is decided by fund houses from time to time within the overall cap on TER. In terms of occurrence, fund houses can subtract charges at their discretion and there’s no pre-determined frequency.

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