While filling a mutual fund form, usually you will see three options to invest:
2. Dividend Pay-out
3. Dividend Reinvestment
Most of the people are confused about the different among these, which one to choose and why?
Which option to choose, It depends on the needs of the individual.
Growth option is better if you want to be invested for a longer period, investor will not receive any payout, but the value of investment will be better in the long term period.
AMCs declare dividends from time to time to their investors out of the returns earned and accordingly NAV falls to adjust that.
Choose Dividend option when you need your money back at regular intervals. Also dividend income from an equity oriented fund is tax-free.
In case of dividend re-investment option, mutual fund company declares dividend, but its not passed to investor and it is re-invested into the same fund. So, from that dividend amount new units are purchased for an investor. For long term returns, dividend re-investment option is not much different from growth option and returns will be same on these.
Dividend Reinvestment option is best option for tax saving (ELSS) mutual funds as it reinvests dividends back into mutual fund so whatever money is reinvested can also be considered for tax saving purpose. e.g. in case of reinvestment mode, let say you purchased P units on Feb’08 and a dividend was declared in May’10, which was used to buy (reinvestment) Q more units. Now you can redeem P units after Feb’11 and Q units after May’13. Also one more advantage here is, you can show investment for Q units as tax saving investment in year 2010-11 and P units in 2007-2008.