I’m very new to the investment world, so I’m apologising in the beginning if the question is too obvious. Also I’m sorry if it’s asked before, but i failed to find relevant threads.
I recently started to invest in mutual funds, and came across the terms of Growth and Dividend. Based on initial not-so-deep google searches, I visualised these as similar to simple and compound interest, the same options we get while creating fixed deposit in banks. However, I received account statements for first time today, and came across the terms “Dividend Payout” and “Dividend Reinvestment”. Now it contrasts with my assumed notions, as I can not visualise difference between Growth and Reinvestment.
I want to understand the difference, and hence let me set up a context.
- Suppose I buy 500 units from a mutual fund at ₹20/- NAV in beginning of a financial year i.e. I invested total ₹10,000/-.
- Consider the scenario that at the end of the financial year, NAV stands at ₹25/-, resulting total worth of my shares at ₹12,500/-.
I assumed the following for the two options:
- In Growth, there will be no effect whatsoever and the same 500 units will continue to next financial year, where their worth may increase, decrease or remain as it is. There will be no tax applicable, until I choose to sell some units that I own at which point it’ll be considered as capital gain.
- In Dividend, ₹2,500/- will be paid out to my bank account. So, my total number of units after that will become 400, but investment worth will remain same as ₹10,000/-, as it was in the beginning. And I have to pay tax on the dividend of ₹2,500/- in the rate of my tax slab based on my salary.
After getting to know about types of dividend - Payout and Reinvestment, it seems that Payout will be somewhat similar to what I described above in point 2. Reinvestment, on the other hand, may be that I’ll get 100 more units, but will get nothing as cash. I’m not sure at all whether that’s the case or not, and no idea how “tax” will be calculated on that ₹2,500/-.
Please let me know whether my ideas are correct or not. I know for sure that it’s wrong for Reinvestment, so please help me correcting my understanding. If there are some other options/conditions which I don’t know about, I’ll be grateful if you can point those out as well and how they will impact this hypothetical scenario.
P.S. My question is mainly for the understanding of different options as of now. Obviously I’m interested to know what should work best for me, but first I want to understand what each options are, their pros and cons and etc.
(Note: I don’t use Coin, at least not yet. Hopefully that doesn’t matter.)