What Is The Difference Between Dividend and Growth Fund. Which Is Better?

A very useful question. Before going to the question of which of the two is better, let us first understand both briefly.

Dividend Funds:

They pay regular dividends to subscribers. Dividend is the reward paid by a company to its shareholders for investing with the company. Mutual funds borrowed this concept and have started paying the unit holders dividends at regular intervals. The dividends are supposed to be paid out of profits, however in the absence of adequate profits, many of the mutual funds follow the undesirable and obnoxious practice of paying dividends out of capital invested, thereby diminishing the actual money invested.

Growth Funds:

Growth funds on the other hand do not pay any dividends. They plow back the profits for purchasing more shares and thereby increase the price or market value of the units. Since the market value of the units are supposed to grow more. Because of reinvesting the profits instead of paying them as dividends, such funds are called growth funds.

Coming back to your question which kind of SIP is better, I will recommend the Growth SIP Fund for two reasons, as follows:

1. In long term investing, all incomes earned must necessarily be reinvested. Though the investor has the choice of reinvesting the dividends received herself, she may be tempted to spend the income, instead. It is better for the fund itself to reinvest the profits on behalf of retail investors.
2. In the light of the highly undesirable practice of paying dividends out of capital, it is advisable to invest in the growth fund where the question of paying dividends does not arise at all.

I hope I have answered your question adequately, Happy Investing!

Note: This is a reproduction of the question I had answered on the website ‘Quora’, which I thought could be useful to the visitors to this blog site also and therefore posted here.

What Is Dollar Cost Averaging?

When you buy shares at different prices on various dates the result is an amazing thin called the 'Dollar Cost Averaging' having a profound impact on your portfolio and returns on your investments.

Dollar cost averaging is a nice sounding term for a simple concept of weighted average cost. let us see the example from our educational portfolio 'Portfolio 2K15'.

The ‘Dollar Cost Averaging’ is done only a way of Reporting. Your port folio shows the average holding cost at a glance for your convenience. However when you click on the name of the scrip the detailed page opens showing the various purchases on the various dates at various prices. Therefore I would say that the actual data and records remain intact and only in the report the holdings are dollar cost averaged.

If we examine my favourite scrip NMDC Ltd., in April 2016 we are holding 444 shares at weighted average holding cost of Rs.107.58. If we go deeper into the detailed purchases on various dates it will look as shown in the following table:

We can see that beginning with a price of Rs.130.48 in March, 2015 when the market was high, we were able to buy the shares at as low a price as Rs.81.35.

The beauty of dollar cost averaging is that over a very, very long period of time of say three to four decades, one is able to purchase the scrips at various levels, from very low and the weighted average cost is optimal, making timing the market, which is extremely difficult, irrelevant.

The second advantage is one can achieve spectacular dividend yield through dollar cost averaging. NMDC is quite generous in paying dividends and the yield is generally 10%, which on a tax free basis is simply superb. Suppose after 20 years the price of the share is Rs.800 and the dividend yield at that time is 10% it means the company paid a dividend of Rs.80 per share. Such a dividend on the 444 shares purchased at an average cost of Rs.107.58 is yield of 74.36% per annum. If you consider the capital appreciation, your 444 shares bough at and average Rs.107.58 are valued Rs.800 apiece, giving a return of 643% in twenty years. 

From the above it becomes clear how Riches are built on stock markets through prudent investments over long periods of time through dollar cost averaging.