4 Replies to “Whats the difference between a Growth based Mutual Fund with a Dividend based Mutual Fund?”

  1. Growth based mutual funds are funds which invest in companies which have high growth potential in future but are not necessarily giving high dividends. Where as dividend based mutual funds invest in companies which have a consistent record of giving high dividends.

  2. Growth based mutual funds are selcting companies that are growing in earnings per share (EPS) at an above average rate (typcially greater than 15% growth annually).

    While a Dividend based is selecting companies based on their Dividend “yield” in most cases. The yield is the Dividend divided by the stock price. Some believe the higher the yielding stocks are a better “value” (cheaper with respect to return compared to other stocks). Value mutual funds typcially invest in companies with dividends but not always.

    Now you asked which is better for a small long term investor. Well studies have shown that Value funds have outperformed Growth funds over the longrun. Based on that, the Dividend funds would be better for you. However, you should have exposure to both (diversify).

    I would recommend that you look at index funds or ETFs(cheaper and that has also shown to outperform in the long run after fees are considered). Index funds match the market returns. If you would like to BEAT the market I would recommend finding a low cost Value fund first and then a low cost growth fund last (and lowest 10% of your portfolio – riskiest).

  3. Hello,

    Growth mutual funds invest in stocks with high earnings and sales growth, a high frequency of positive earnings surprises, and positive price momentum. Growth mutual fund managers find many of their stocks in the technology and heath care sectors of the market.

    Fund that focus on dividends are employing one of the many forms of value based strategies. Funds that employ dividend strategies are looking for appreciation as well as dividends. You will find that many dividend oriented funds have the name Equity Income in their names.

    The strategy you should opt for would be based on your financial circumstances, time horizon, needs, preferences and especially your risk tolerance. Statistics show that value equity based strategies outperform growth based strategies over time and also tend to have less volatility. If however, a fund’s primary focus is dividends and ignores appreciation potential, it may not outperform a growth strategy over time.

    I hope this helps.

    Michael A. Weiss, CFA
    The Editor
    The Mutual Fund Investor

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