You might have heard “A lot can happen over a Cup of coffee”, I was there in a cafe with one of my good friends few days ago; he is a regular investor in Mutual Fund but he never observed that each scheme provides different kind of dividend option so that an Investor can select one depending on his future requirement. Normally, most mutual funds schemes offer two options – Dividend and Growth. One more option is available there i.e., Dividend Re-Investment option. All the above options have same portfolio in terms of their returns; the only difference lies in the structure of the cash flow and income accruals for the investor & the investor’s tax ability, number of units held and value of those units.
1.) Dividend Payout Option: In this scheme, Fund declares dividend from time to time. There are different types of schemes: some of them declare their dividend on a daily basis/weekly/monthly…..annually, subject to availability of profits. Whenever a dividend is paid, the NAV (Net Asset Value) of the unit falls in accordance with dividend paid and income distribution tax (if applicable). This reduced NAV after the dividend payout is called Ex-Dividend NAV. If the dividend is announced and until it is paid out, it is referred as Cum-Dividend NAV. The dividend payout does not change the number of units held by the investor; NAV will fall with that extent as described above. The best part is the dividend received by the investor is not liable to any type of tax.
2.) Dividend Re-Investment Option: In this option the dividend is re-invested in the same scheme and additional units are allotted to the investor.
For example, if the dividend declared is Rs. 2 per unit and 100 units are held by the investor; the total dividend is Rs. 2*100 = Rs. 200. The ex-dividend NAV of the scheme is Rs. 20; Rs. 200/20 i.e., 10 units will be added to the unit-holders portfolio.
3.) Growth Option: No dividend is declared in this option. The NAV captures the full value of portfolio gain. Normally, this kind of option has high NAV as full gain is reflected in the NAV.
By the above 3 options it’s very clear that one can select an option depending on his or her requirement. If one is looking for regular income then he should go for the first option i.e., Dividend option. If one is looking for good returns in a longer run with no regular income then one should go with Growth option. Before buying any scheme you can check out which option of the scheme you would like to go for; that suits your requirements best.
If you have something to add, Please post your thoughts in comments. I would love to hear from you.
Happy Investing!!
