Thinking of Investing in Mutual Fund?? In Mutual funds there are 2 options you might have heard of:
- Dividend Payout
- Dividend Reinvestment
- Growth
What are these 3 options for?
When you invest in mutual funds, you get dividends at regular intervals. and you get 3 options for "how to handle that dividend amount?" You have to select these options at the beginning (while investing) itself.
Those 3 options are:
- Dividend Payout
- Dividend Reinvestment
- Growth
Short Video :
1. Dividend Payout (DP) :
If you select the dividend payout option, whenever you get a dividend on your mutual funds, that dividend amount gets automatically deposited directly to your bank account.
2. Dividend Reinvestment (DR) :
If you select the dividend reinvestment option, whenever you get a dividend on your mutual funds, that dividend amount gets reinvested in the same mutual fund scheme. means new quantities (units) of the same mutual fund scheme are bought with that dividend amount.
3. Growth (GR) :
If you select the growth option, whenever you get a dividend on your mutual funds, that dividend amount gets reinvested in the same mutual fund scheme, but here new quantities (units) are not bought like the DR option. but Instead, the dividend amount is adjusted in the price (NAV) of your existing investment.
Comparison :
- In the DP option, you don't get any compounding effect.
- In both (DR & GR) options, you get a compounding effect.
- In the DR option, Price (NAV) remains the same but Quantity increases.
- In the GR option, Price (NAV) increases, and Quantity remains the same.
Which one is best for you?
- If you want periodical (monthly/quarterly) income, then you should go for the DP option. but always remember you will lose out on the compounding effect.
- If you want your investment to get a compounding effect then you have 2 options DR and GR. But my personal favorite option is Growth (GR).
- Reason:
- If you are invested in any kind of close-ended scheme (scheme having a locking period) with the DR option, then quantities bought due to the DR option will again be locked for the locking period tenure starting from the dividend date.
- means you have to wait for a long time if you want to sell all the quantities.
- Even if you are invested in an open-ended scheme (scheme without any locking period) with the DR option, you have to wait for 1 year from the dividend date to sell those quantities otherwise Exit load will be levied on those quantities bought due to the DR option. similarly, short-term capital gain (STCG) will be levied on those quantities.
- On other hand, Growth (GR) option doesn't have those problems. Since, In the GR option, NAV is increased, no new quantity is bought. The buy date remains the same as that of your original investment date. and you don't have to wait long to sell all the quantities.
- So, the Growth (GR) option is the best for you. As it gives compound effect with no problem of extra locking period, extra STCG, and extra exit load, unlike DR option.
How to choose these options while investing?
- When you choose the mutual fund scheme to invest in. you might see the same scheme name with 3 different option names included in its name.
- If you see the abbreviations Dividend Payout (DP), Dividend Reinvestment (DR), or Growth (GR) in any mutual fund scheme name, those abbreviations or full names indicate the dividend option for that scheme.
- But, if you invest through apps like ETMONEY or Groww, you will get the default option as GROWTH these days. So nothing to worry about.
Get your concepts clear and start investing...
If you have any doubt about investing, feel free to drop it in the comment box below. I will try my best to help you and smoothen your investment journey.
Thank you,
Akshay P Daga