Mutual Fund Growth Vs Mutual Fund Dividend option


Are you confused while selecting mutual fund dividend or mutual fund growth option? Are you not clear how your selection will impact your investment portfolio?

Most of the mutual fund offers two schemes
1) Dividend option – Payout or ReInvest
2) Growth option

What does Mutual fund scheme mean?
Mutual fund dividend payout option – Declared dividend amount will be paid back to you and your fund value will be reduced by declared amount.
If AMC declared dividend of Rs 2 per unit and you have 100 Units with NAV of Rs 10 then you will get Rs 200 as dividend and fund value will be become Rs 800. So you will get your own money back after reducing from your fund value. This dividend amount will be tax free as of now.

Mutual fund dividend ReInvest option – Declared dividend amount will be reinvested in same portfolio and NAV will be reduced by declared amount.
If AMC declared dividend of Rs 2 per unit and you have 100 Units with NAV of Rs 10 then the fund NAV will be become Rs 8 and you will get additional units of Rs 200 with NAV of Rs 8(25 units more). So your total numbers of Units will be increased and fund value will be remaining same. Hidden clause – Every reinvestment transaction will have separate lock in period.

Mutual fund Growth option
The fund value and NAV will grow based on mutual fund investment performance. It does not depend of dividend declared. So, for same mutual fund scheme, NAV of growth option will be higher then dividend option.

Should I buy Mutual fund dividend or growth?
It depends purely and only on your investment decision.
Growth Option - If you are investing for wealth creation in long run
Dividend Payout option - If you are investing for regular or infrequent income
Dividend reinvestment option – I suggest never because it does not serve any of the above strategies. Instead go for Growth Option

Should I buy dividend payout option for ELSS or Tax saving mutual fund?
If you are thinking purely for tax saving perspective and does not believe in long term investment then you can consider dividend payout option. Again, I suggest you should consider growth option because ELSS or tax saving Mutual fund has lock in period of only 3 years. So you can get entire fund value at one time.

Does Growth option give higher retunes than dividend option?
You can not predict which fund option will perform better than other.It is driven by equity market trends.
Let’s assume your current portfolio worth Rs 10000
Case#1 you get dividend of Rs 3000 and remaining fund value Rs 7000.The Equity market crashed from next day then only Rs 7000 will be reduced to lower fund value
 So dividend options worked for you. If you have chosen growth fund then Rs 10000 will be reduced to lower fund value.
Case#2 you get dividend of Rs 3000 and remaining fund value Rs 7000.The Equity market grows up drastically from next day then only Rs 7000 will be increased to higher fund value. So dividend option did not work for you to get benefits of Bull Run of equity market. If you have chosen growth fund then Rs 10000 will be increased to higher fund value.

So, understand your goals before selecting mutual fund growth or dividend option. Do not think about short term gain and plan for long term gains.
I suggest Mutual fund investment through SIP in Growth fund.

13 comments:

  1. Nice explaination..easy to understand difference and impact of options

    ReplyDelete
  2. very nice explanation... easy to understand to choose clearly in options growth and dividend...

    ReplyDelete
  3. Growth is not the right option all the time. Consider a bear market and then a bull market. If the index reaches back to the same point NAV will not move at all. In short the return will be zero.

    Like 2007 sensex was 20000, which was recalimed only in 2010. So for 3 years the return would be zero. I am assuming that NAV move parallel to the index over the short term and also the long term, which is quiet realistic assumption.

    In growth option your only return can be NAV appreciation. While in dividend it wll be NAV appreciated and also the declared dividends.

    Dividend option gives you an opportunity to encash on the increased AUM of the fund. So choose funds which declare regular dividends. Even in bear market they will share some of the captial appreciation with the investors. Some good examples are HDFC Top 200, RSF Equity (Great dividend record), Templeton India Growth and many more.

    Also dividend reinvest option in a way gives the best of both worlds. It also pays the dividend and allows you to mimic the growth option by reinvesting the capital.

    In fact many noted investors / fund managers (Warren Buffet, Mark Mobius) look for good dividend paying stocks and mutual funds.

    ReplyDelete
  4. Thanks for updates.
    I hope you understand the difference between dividend of Mutual fund and Stock. Dividend amount of mutual fund will be deducted from fund value an d given back you.

    True,It gives different return in growth and dividend payout option in bear and bull market and Nobody can predict tomorrow's market run.So let's assume you are investing 2000/Month for 10 years with goal in mind then growth will be better option.

    in example of year 2007 to year 2010 returns-
    your entire fund value will appreciate In growth option but your partial fund value (after deducting dividend)will grow in dividend payout option.

    So,its purely driven by your goals while selecting MF option.Please send me query to Help@investmoneybetter.com jigvishu@investmoneybetter.com if you still have doubt

    ReplyDelete
  5. I hope you understand the difference between dividend of Mutual fund and Stock
    -- This is just a matter of perspective. Owning a stock is owning a business. Company has the right to reinvest the profit of the business or give it back to the investor as dividend. In this matter the dividend is same in both stock and mf. The line of difference lies in the fact that every unit of MF is not a share and every NFO is not an IPO.

    What do you consider as your own money? I dont consider capital appreciating as my own money. That appreciation is the profit which I have earned for the risk which I have taken in the asset class. My money here is only the investment that I have made, rest is the return on risk and my judgement. If a investor buys an MF at an inflated NAV in the name of dividend payout, I will say he is getting back his own money, but not the investor who faithfully held on to the fund. Because it was the second investor who bought the fund at the lower price and saw his capital appreciate over time.


    ---
    So let's assume you are investing 2000/Month for 10 years with goal in mind then growth will be better option.
    ---There si dividend reinvest option as well and it is safer than the growth option also.



    ---in example of year 2007 to year 2010 returns-
    your entire fund value will appreciate In growth option
    --- Yes the entire fund value will appreciate, but only after it reclaims back the loss of 3 years. In these 3 years your fund value would have remains the same and sensex had reached the same level. While in dividned pay out mode you will be paid out some income, while in dividend reinvest you will be reinvesting your profits.

    ReplyDelete
  6. Think about bull and bear market condition in all scenario.
    Let me explain own money concepts:
    1) If markets goes up from 1st purchase
    Assume 100 units at NAV 10 = fund value Rs 1000
    NAV grows by Rs 10 so Current NAV RS 20 = FV RS 2000.
    dividend declared Rs 5 per unit today
    Dividend payout(part of appreciation) Rs 500
    Current NAV Rs 15 so FV = Rs 1500
    So remaining investment +dividend = RS 2000
    so dividend amount will be deducted in your fund value and given back to you after deducting from fund value.
    -in share dividend, your investment(nos of share*share price) will be remain as it is and divident is pure profit shared with you.
    2)If markets goes down from 1st purchase
    Assume 100 units at NAV 20 = fund value Rs 2000
    NAV falls by Rs 10 so Current NAV RS 10 = FV RS 1000.
    dividend declared Rs 5 per unit today
    Dividend payout(your loss) Rs 500
    Current NAV Rs 05 so FV = Rs 500
    So remaining investment + dividend = RS 1000
    so dividend amount will be deducted in your fund value and given back to you after deducting from fund value.
    ==dividend payout is not profit of mutual fund company.
    ==it can be profit or loss of your fund value shared with you.

    --dividend reinvest vs growth.
    in both case your money including dividend will remain invested in market so you can not say dividend reinvest is safer than growth.your fund value will remain same even after dividend reinvested(only nos of units will increse) similar to growth option.
    ==major drawback of dividend reinvst - every reinvest have seperate lock in period.

    --Year 2007 - 2010 time frame
    in growth,Assume your fund value will be same as invested in 2007
    in divident payout,your current fund value +divident (your profit) together will(may) be less than what you have invested in 2007.
    WHY: When bull market started(may2009),your entire money grows in growth option.
    Summary - growth option will be advised(have seen many analyst saying)for Long term goal

    ReplyDelete
  7. ==Assume 100 units at NAV 10 = fund value Rs 1000
    NAV grows by Rs 10 so Current NAV RS 20 = FV RS 2000.
    -- I dont think the Rs 10 capital appreciation can be called as my own money. That is just he profit that I have earned for the risk I have taken by investing in equity. My money here is just Rs 1000 investments. Rest is profit and that profit is subject to market volatility as is the case in growth MF also. Dividend option allows you to reclaim some of this profit, but in growth if you want to claim this profit, you have to redeem the unit. Full stop.


    ==major drawback of dividend reinvst - every reinvest have seperate lock in period.

    -- Like I already pointed out --> You are just thinking of ELSS which have a lockin period of 3 years. MF dont have a lockin, only exit load (1%) if redeemed within a year. That applies to growth option also.

    ReplyDelete
  8. ==WHY: When bull market started(may2009),your entire money grows in growth option.

    This will only happen when your NAV for growth scheme reaches back to the 2007 level. In 2007 market was at peak so were NAVs of most schemes. They fell in 2008 and now are back to same level as 2007. So net profit is zero.

    --Summary - growth option will be advised(have seen many analyst saying)for Long term goal

    I would say dont go by analyst and try to apply a bit of maths to your investments as well. Analyst generally tend to say what is good about an investment and how markets will move, but seldom are they right.

    For instance, you might have seen many of advisors advising about online term insurance. But here is the catch. Online term plans are provided by companies which have bad claim ratio. Analyst dont take that into consideration. There is not much service provided and the employees of insurance company also dont know much about that plan. (I myself have enquired about this). Analyst dont tell you all these things on TV. They just look at things from a high level.

    ReplyDelete
  9. Example:

    Say Mr.A invests in a MF at NAV 50 (100 units). Over time NAV appreicated to say 56 (long term not short term >1 year ).

    Now Mr. B also buys 100 units at NAV 56.

    Again over time NAV goes to 58. Fund decides to declare dividend of Rs 4 lets say. So NAV will fall close to 54. Now lets see who has gained what;

    Mr. A's Investment = 5000 (50*100)
    Mr B's Investment = 5600(56*100)

    Mr A's capital appreication at 58 NAV = ((58-50)*100)=800
    Mr B's capital appreciateion at 58 NAV = 200 ((58-56)*100)

    Mr. A's dividend income = 400
    Mr. B's dividend income = 400

    Here Mr. B received a total of Rs 400, of which 200 was his actual profit or capital appreciation, but the rest 200 was his own money as I would call it as that was taken out of his invesment.

    On the other hand Mr A. was better off receiving a part of the profit or capital appreciation (just in case if market had fallen). He could have got that deposited in his savings account or reinvested it back in the MF. If market had fallen he would be happy that he could encash some profit. If market had gone up, he would be better if he had reinvested. It is a matter of choice he makes.

    It is my feeling that analyst generally tend to ignore this thing. The question that I would ask to them is what do you consider as your own money : your principal or the appreciation in your principal? My answer will be prinicpal, rest is profit.

    In our society there are many people like Mr.B who buy MF on the news of dividend declarations and dont realise that they are getting back their own money. In reality it is Mr. A who get his worth. It is because of foolishness of these people (Mr B) that a negative bias has been developed towards dividend options in analysts view point. In fact even SEBI has came out with a rule that dividends should be declared on actual gains but not on gains already held from investors money. But again that is difficult to impelement as MF will have to track what is gain for each individual and then declare dividends on an individual basis. How can an MF see how much gain did Mr A and Mr B make? And what if that was an SIP? More complex calculations :(

    You had referred me to this link
    http://www.valueresearchonline.com/story/storyview.asp?str=100609


    Well one should read between the line at that link. The author says that gains are same in both the option only problem is tax implication, but that is only if you are a short term player. Over a long term, which I belive most of us are :) we dont have to worry about we choose growth or dividend.

    My feeling has been that dividend reinvest offers best of both growth and dividned payout.

    ReplyDelete
  10. http://www.thehindubusinessline.in/iw/2005/01/09/stories/2005010901111000.htm

    ReplyDelete
  11. Thanks for spending more time and replying in detail.Sorry for the delayed response.

    i would like to say. If selected mutual fund is good then fund options like dividend or growth will not impact much on ultimate returns.

    fund options selection will depend on elss fund,long or short term investment,regular income or one time return.

    as you said you believe in dividend reinvest and i believe in growth option.
    Both hindu newpaper link and vro link says and we know returns in both cases will be identical only.

    As mentioned by you in example of Mr. A and Mr. B,Many investors become Mr b because of lack of knowledge(getting dividend amount from own invested money).You can also choose dividend payout with proper planning.

    ReplyDelete
  12. I strongly believe that for short and medium term growth option is best. For conservative investor dividend payout option will be better. For long term investor definitely dividend re-investment is best of all

    ReplyDelete
  13. AS VR suggest GROWTH option from 1st APR 2012-DTC
    http://www.valueresearchonline.com/story/h2_storyview.asp?str=17064

    ReplyDelete