When you opt for growth option, whatever returns your fund makes are invested back into the fund this includes the dividends as well. However, if you opt for a dividend option the profits made by the firm are distributed to mutual fund holders on a periodic basis.
The dividend option is recommended for those who have retired & need periodic payments or for those who need to supplement their income with regular cash flows. One thing to be kept in mind is if the fund does not make any surplus then dividends will not be given out.
