What is the difference between growth, dividend and dividend reinvestment options in a mutual fund? Which is the best option?

In a growth plan, the gains made by the scheme are reinvested. Therefore, the net asset value (NAV) moves up. In a dividend plan, the gains are periodically distributed as dividend. So the NAV drops to the extent of the dividend, whenever it is paid out.

Dividend reinvestment is a facility to put the dividend back into the scheme, buying up some more units. Dividends are tax free, whereas an investor who sells his or her units to earn the gains will have to pay capital gains tax on the gains, depending on the holding period.

Therefore, investors who need income should choose dividend plan, and investors who can hold for longer period, should choose the growth option.

In an equity fund, gains realized after one-year holding period are also not taxed.

A dividend reinvestment program or dividend reinvestment plan (DRIP) is an equity investment option offered directly from the underlying company. While the term "DRIP" is usually associated with company-sponsored plans, reinvestment of stock dividends is also available at no cost through some brokerage firms.

Dividend Reinvestment is when you take a monthly, quarterly, or yearly cash dividend a company pays on your existing stock holding and use it to buy more shares of that company automatically instead of hold that cash in your account or withdrawing for use.

Does that make sense?

The growth option on a mutual fund means that an investor in the fund will not receive any dividends that may be paid out by the stocks in the mutual fund. Some shares pay regular dividends, but by selecting a growth option, the mutual fund holder is allowing the fund company to reinvest the money it would otherwise pay out to the investor in the form of a dividend. This money increases the net asset value (NAV) of the mutual fund. The growth option is not a good one for the investor who wishes to receive regular cash payouts from his/her investments. However, it's a way for the investor to maximize the fund's NAV and, upon sale of the mutual funds, realize a higher capital gain on the same number of shares he/she originally purchased - because all the dividends that would have been paid out have been used by the fund company to invest in more stocks and grow clients' money. In this case, the fundholder does not receive more shares, but his/her shares of the fund increase in value.