Selecting a plan between a fund with a growth option and a fund with a dividend reinvestment option is very confusing and there are many choices. Both the options are having their own advantages and disadvantages. It depends more on the individual needs and circumstances of the investor.
Mutual Funds with a Growth Option:
In the growth option, the investor will not receive any dividends that may be paid out by the stocks in the mutual fund. But by selecting a growth option, you are allowing the fund company to reinvest the money received as dividends. This money increases the net asset value (NAV) of the mutual fund. If you want to receive regular cash from the mutual fund, you should not go for it. But it will maximize the fund's NAV and receive a higher amount when you sell them off. In this case, the investor does not receive more shares, but his/her shares of the fund increase in value.
Mutual Funds with a Dividend Reinvestment Option
Dividends obtained will be used to purchase more shares in the fund. Cash is not paid out to the investor when dividends are paid on the stocks in the fund. Cash will be used to buy more fund units and add them to individual investors' accounts. In this system, the number of shares owned will increase over time. The account grows in value faster. There are many investment companies which will offer this service to shareholders without any extra cost. Investors realize a capital gain upon the sale of their units
Selecting an Option
It is up to shareholders whether they prefer to have dividends reinvested or paid out. But dividends in IRA accounts may be reinvested by shareholders who have not attained the age of retirement. If they do so they will not incur early withdrawal penalties from the Internal Revenue Service (IRS).
In this case, the dividends are paid directly to the shareholder. Dividends are swept directly into a cash account, transferred electronically into a bank account or sent out by check. No fees for having their dividends paid in cash.
As far as tax matter is concerned it will be the same in both the methods.
The choice of a mutual fund will be different from one investor to another. There are so many options there with so many different ways. It is better to examine its specific attributes and confirm that the plan suits our requirement. I suggest you contact a good financial advisor and explain to him your requirement so that he will guide you accordingly.