Investing in Mutual Funds – Growth, Dividend Payout or Dividend Re-investment?

While investing in Mutual Funds which option should I choose Growth, Dividend Payout or Dividend Reinvestment? This is a question that haunts most of the New/First-time investors. So let’s understand the three options available.  

Growth

Here you leave your money to grow and cash out anytime. Here the advantage is your gains get accumulated till the end without any erosion. The disadvantage being there is no cash flow from the investment in terms of Dividend.

Dividend Options

There are two sub-options in this case

Dividend Payout:

In this case, the dividend is paid in cash back to you. Here the advantage is you get some cash flows from your investment. The disadvantage being the final value of investment gets eroded.

Dividend Reinvestment:

In this case the dividend declared is used to buy more units of the same fund for you. I don’t see any reason why anyone should choose this option.

Let us understand what happens when Mutual Fund gives the dividend.

In the table below we have taken XXX Fund, which declared 15% dividend.

As you can see the NAV of XXX Fund is reduced by the amount of Dividend paid by the fund. So, in the end, you don’t gain anything extra. It’s just your money paid back to you.

Unfortunately, most Mutual Funds declare dividend just to attract investors, while truly speaking there’s no gain for investors.

Let’s see which option is best suited for an Investor in Mutual Funds. Growth option is the best one because most of the investments in the equity mutual funds are for the long-term goals. If we opt for the dividend we almost utilizing the money reserved for the long-term goals. Dividend Reinvestment is as good as Growth.

There may be a situation where you need some cash flows from your investment then go for Dividend Payout. But always keep in mind the dividend is your money only. You cannot predict how much you would get and when. So it hardly helps!