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Why Dividend Option is Better than Growth Option for Mutual Funds

by Abhishek   ·  December 1, 2011   ·  

Mutual funds are a popular investment medium for many investors . Most of us choose mutual funds very carefully , but we don’t always choose the mutual fund option with that much attention . The two most common mutual fund options are Dividend and Growth . Its important that you select the right option for you .

In the dividend option you receive the dividend money , but in the growth option that dividend amount is reinvested in your mutual fund scheme . To understand better let us take the example of HDFC Equity Fund which started in 1994 , its November 2011 NAV for the growth option is 240 Rs. while the dividend option NAV is Rs. 40 only . This difference of 100 Rs is nothing but your own money paid back to you . For me dividend is like partial profit booking . In the mentioned example this partial profit is 100Rs . The performance of any fund is calculated on the basis of growth option and not dividend option  .

The greatest benefits of dividend options is that you get the tax free dividend money . You get the money periodically in form of dividend which you can either invest somewhere or you can also use in your day to day expenses  . Another advantage of dividend option is that your money is less exposed to market fluctuation , as some part of the NAV you have received already in the the form of dividend ( which I called as partial profit booking ) ,so in case the market shakes your less money is at risk  .

The true benefit of dividend option can be achieved only when you are utilizing that dividend money . If you keep it in your saving account it will only grow by 4% but if you invest it somewhere else it can grow by more than 4% . There are many people who forget that their mutual fund has paid dividend and the money is lying in their bank .

1 Comment

  1. Arjun

    Hi Abhishek, I was reading your blog since few days and found it interesting.
    Here you s my situation, suggest a solution.
    I am 28, unmarried and living with my parents. I have 50 lakhs corpus and willing to invest for my goals like
    1. Monthly income of 20-25 k
    2. Marriage in 2 years
    3. Long term wealth for my future usage, say after 20-25 years.
    4. Term insurance and health plan for 3 of us.
    5. Average risk taker, likes equities. I co-own a budding brokerage franchise started 1 month ago.
    6. I have 5 L apart from 50L which I use as emergency fund and for IPO s mostly for listing gains.

    I request you to suggest good solutions for my scenario.

    Thanks & Regards,
    Arjun

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