Right option while buying Mutual Fund

POSTED BY Amit ON May 2, 2012 4:00 pm COMMENTS (6)

Which option of mutual fund will give me better return on a long run, is it Growth option or Divident Re-investment option? Please explain me with example of SIP for 5 years.
Also how is divident is calculated for Growth option or Divident Re-investment?

6 replies on this article “Right option while buying Mutual Fund”

  1. Amit says:

    Thanks a lot…

    1. Dear Amit, just a small addition to all the discussion, all these things are valid only if the funds in question are Eq. funds. If the fund is a debt fund, the return ‘ll not be same as Debt funds are liable to Dividend Distribution Tax & thus reducing the over all return in comparison to Growth option over the long term.

      Thanks

      Ashal

  2. Just to add to what wUc said –

    MF schmes have two options – Growth and Dividend.
    Dividend is declared only for the Dividend option not for growth.
    Under dividend:
    a) You can get a payout of the dividend
    b) You can reinvest the dividend

    If you reinvest the long term accruals/values are the same.

  3. Find comments inline – wUc
    Thanks for your detailed reply… Most of my doubts are clear… I have couple of questions for you…

    1. Is divident declear for Growth Plan & Divident Re-investment same?

    wUc comments – YES

    2. If yes, then if NAV today for Growth Plan is 100 & Divident Re-investment Plan is 50, I have done investment of Rs. 10000
    So for Growth Plan I got 100 Units & for Divident Re-investment Plan I got 200 Units.
    Now, company declears Rs. 5 devident per unit. In this case Divident Re-investment is Winner… right?

    wUc comments- No you thought process is wrong. 1000 rs invested in what ever option (growth/dividend/re-investment) after X years will have the same yield.
    Meaning in case of growth you will get lumpcum when you sell.. in case of dividend you need to add all the money that you have got as divided + value at selling.

  4. Dividend reinvestment and growth options theoretically have the same return over any period of time assuming there are no other charges/levies.

    Lets take bulk investment example.

    NAV today for both Growth and Dividend reinvestment option = 10
    Amount invested = 5000
    So units alloted = 500

    After few months:
    Assume NAV = 12
    Dividend paid = 2
    So, actual Dividend paid = 2*500=1000

    NAV of Growth = Still at 12
    Value of growth scheme = 12*500 = 6000

    NAV of Dividend Reinvestment = 10 (falls to the extent of Dividend)
    Dividend of 1000 is reinvested
    So you get 1000/10 = 100 fresh units
    So the holder now has 500+100 = 600 units
    NAV = 10
    So, value of Dividend reinvestment option = 600*10 = 6000

    As you see, both are same.

    Differences:
    1) The dividend of 1000 invested is considered as fresh investment and you will need to wait for 1 year from that invested date to make it eligible for Long term gains
    2) If in future you need a steady cashflow you can change the dividend reinvestment to payout so you may get paid the dividend periodically if the scheme does so.

    Trust this clarifies.

    1. Amit says:

      Thanks for your detailed reply… Most of my doubts are clear… I have couple of questions for you…

      1. Is divident declear for Growth Plan & Divident Re-investment same?
      2. If yes, then if NAV today for Growth Plan is 100 & Divident Re-investment Plan is 50, I have done investment of Rs. 10000
      So for Growth Plan I got 100 Units & for Divident Re-investment Plan I got 200 Units.
      Now, company declears Rs. 5 devident per unit. In this case Divident Re-investment is Winner… right?

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