Growth vs Dividend vs Dividend Reinvestment Option
Many investors has the common confusion in selecting the growth/dividend/dividend reinvest option. Here is short summary of them.
Dividend Option: Dividend offered by the Mutual Funds is similar to the the dividends given in stocks. The funds will give the dividend when the fund manager thinks that there is enough excess funds available for the dividend, like in stocks. The dividend we got can be invested in any where. Only remaining funds after giving the dividend are invested in the stocks.
Growth Option: In this the fund will not offer any dividend, rather the fund will invest all available funds effectively in the companies so that they can produce high returns in the equity market. Yes there is a scope of loss also. But who will give 30-40% returns for your investment? Bank deposits, gold? None.
Dividend Reinvestment Option: This is somewhat tricky. In this method the fund company will reinvest the dividend offered in the same fund rather than giving it to the customer. This will some times gives better results than the growth option though it looks similar to it.
Investors who wants good returns in a long term view can go for growth or dividend option of their choice. However the investors who wants to be on safer side can go for dividend option as it will give at least some returns if the fund may give losses during tough times. Since nobody can guess the future of Capital markets, we cannot rely on this method at all times.
In dividend reinvestment option the dividend declared will be immediately invested in the same fund instead of giving it to the customer. Where as in dividend option the dividend is directly given to the customer. So the extra money invested in dividend reinvestment option will yield some more units. So the number of units allocated will be more in case of dividend reinvestment option at the time of dividend declaration, but the NAV will remain same as with the Dividend option.
Some times Dividend option is useful in some cases for example, the fund is performing extremely well and share the dividends and after some time it incurs losses. In this case we would avoid the losses on the dividends shared and also we got some of our money in the form of our dividends. However, we cannot say that this would become true at all times.
As such there is no thumb rule to decide which one is better- Dividend or Growth. It's a personal preference. These options do have some pros and cons. Best strategy is one has to divide the MF investment portfolio in to weighted average basis. Make sure you have some percentage allocated to growth options and some percentage allocated to dividend options. Dividend options are always easy to track as we can be expecting dividend at regular intervals. Growth options give better results but waiting time is longer and are more prone to the market volatility. Dividend Reinvestment obviously a better option but you need to be choosy about picking up the right fund.
Like it on Facebook, Tweet it or share this article on other bookmarking websites.