Monday, June 22, 2015

Why Mutual Fund Growth Option Is Better Than Dividend Reinvestment Option?

1. When you compare dividend option and growth option of any scheme, then you always find that growth funds are the winner in bull phase of the market. Because in bull phase of the stock market, most of the stocks get a higher valuation and NAV of growth scheme high, and we see an attractive current portfolio value when we compare it to dividend option. 
2. In opposite side, you know dividend payout funds are the winner when market correct more than 30 % because in this situation past dividends are consider as profit bookings. 
3. Today we compare dividend reinvestment option with growth option because they look like same. So if you read this article carefully then you understand the difference in growth option, dividend reinvestment option and dividend payout option in any mutual fund scheme. 
4. For example, we choose Franklin India Prima Plus plan and see this comparison sheet which provided by Shri Vineet Agarwal:- 
7. So:-
(1) From Jan 2000 to Sept 2016 SIP of 1000 per month in Franklin India Prima Plus plan growth option NAV value of units is INR 15,65,344.
(2) From Jan 2000 to Sept 2016 SIP of 1000 per month in Franklin India Prima Plus plan Dividend option we get INR 385887 as NAV value of units and INR 298756 as dividend, so total NAV value+dividend is 6,34,644
(3)From Jan 2000 to Sept 2016 SIP of 1000 per month in Franklin India Prima Plus plan , dividend reinvestment option NAV value of units is INR 15,42,689.
12. Conclusion: - Growth option and dividend re-investment option are near about same, but growth option is slightly winner over dividend reinvestment option so if you want regular tax-free dividend income then choose growth option and use my monthly tax-free dividend idea which I describe in this article:- 
How to get Monthly Tax-Free Dividends from Growth Funds
regards.
Discloser:- I Mahesh Chander Kaushik author of this research report is an existing research analyst and passed NISM certification for research analysts. I am also applied for a grant of registration under SEBI(RESEARCH ANALYSTS) REGULATIONS, 2014 hereby disclose about my financial interest in the subject company and the nature of such financial interest:- 1 Me and my associates or relatives already hold some units of HDFC mutual fund scheme, so my personal interest is included in this scheme. 2. Me and my associates or relatives have/have not any actual/beneficial ownership of one percent or more securities of the subject company(HDFC mutual fund ). 3. Me and my associates or relatives have /have not any other material conflict of interest at the time of publication of the research report. 4. Me and my associates or relatives have/have not received any type of compensation from the subject company(HDFC mutual fund ) in the past twelve months. 5. I am not served as an officer, director or employee of the subject company(HDFC mutual fund ). 6. I have been not engaged in market making activity for the subject company(HDFC mutual fund ).

21 comments:

Harshit Solanki said...

Thanm you sir..very good article
i have recently started 2 sip im growth funds my next 2 will be in dividend reinvestment funds. Thanka to you
please whtsapp me on 00971505502153 it would me my pleasure to learn from you.

Varun Monga said...

Hi Mahesh Sir,

I would like to buy your book here in USA.

Plesae let me know what site or url to buy.

Regards
Varun

Mahesh Chander Kaushik said...

Varun monga ji and harsit solanki ji
thank you for your comment
you can buy my book from amazon.com in USA here is the link
The Winning theory in Stock Market

Himanshu Modi said...

Dear Sir,

On 3rd January 2000 HDFC top 200 dividend plan NAV value is around 21/- instead of around 9/- Rs.
Data Source Moneycontrol.

If so than all calculation need to be reworked and it seems growth option is better.

Mahesh Chander Kaushik said...

Himanshu modi ji
Namaskar
I check data on money-control website and find my data is accurate.
I think you check HDFC top 200 G fund instead of D fund
Check it again and if you still find problem then mail your screenshot to me for further resolution of your problem.
So all calculation which I given here is accurate and error free
Regards

RasikFunda said...

Sir, what about DDTpaidby fund? It will have impact on NAV.

Mahesh Chander Kaushik said...

Rasik funda ji
No DDT (Dividend distribution tax) to be paid on equity oriented mutual funds
DDT only applicable on debt funds
So this article is only for equity oriented mutual funds where Dividend distribution tax not applicable.
Regards

Rahul Gupta said...

Good after noon sir, i am investing through SIP in HDFC top 200 Growth fund. I have also made calculation Growth Vs Dividend as you did. after 42 months i am getting 1000 less in dividend option..may it be beneficial for long period because unit will get increased and please tell me if any mutual fund declares dividend on 05.03.2015 it means we will get dividend for the units which is accumulated from the date of starting to 05.03.2015. is it right? thanks sir

anuj said...

Sir, I have been doing SIP's for past 5 years & i was so amazed to see so much diffence in returns of a fund under different options. I have all SIP's under Growth option.
No offence to you. But i did the same calculations myself.
An investment of Rs.10000 in HDFC Top 200 Fund on 3/Jan/2000 will be worth below as on 9/Nov/2015
For Growth option, Rs.150846
For Div Reinvestment option, Rs. 152522

There is not much difference in the two, even with respect to the principal amount. Please Recheck your calculations.

Mahesh Chander Kaushik said...

Rahul ji
You forget to reinvest your dividend and increase your units which you get from dividend reinvesting.please recalculate it and if still any problem then share your excel sheet with me ( mail your sheet to mahesh2073@yahoo.com) for a correction.
when a mutual fund declare dividend then it also declare record date for dividend so you get dividend if you hold units on record date.
Anuj ji
I think you do not calculate on your own excel sheet. I think you may use any on-line return calculator like moneycontrol etc. these on-line calculator also not increase units which you get by reinvesting of dividends.
If you make your own excel sheet then please share your excel sheet with me ( mail your sheet to mahesh2073@yahoo.com) for a look out of errors and correction.
I wonder that why people not check my above calculation which I give in this article? and if really anyone find any error then please report me.
Overall thank you both of you for check this formula
Regards.

Anonymous said...

GREAT ARTICLE SIR JI..REALLY EYE OPNER-ROHIT BISHT,AJAY MATHUR

Rahul Gupta said...

I did like you sir.. I have reinvested my dividend units. Return almost same in 42 months. Your calculations is for long term. I think dividend reinvestment option very good for 10 years. I have started sip in hdfc top 200 fund from 5 april 2012 to 5 Feb 2014(23 months)(2000 per month) after that I increased to 3000 per month from 5 March 2014 to..... Plz guide sir.. Or is it advisable to continue sip 3000 per month in a single sip.

Mahesh Chander Kaushik said...

Thank you Rohit Bist ji, Ajay Mathur ji and Rahul Gupta ji for your valuable comments.
Rahul ji now I understand your situation, My example is work best when you make an one time lumsum investment because if we compare one time lumsum investment in growth and dividend reinvestment fund then dividend reinvestment won because It give us SIP benefits.
But you compare it in SIP investment
In this method I recommended you to profit booking timely on basis of this formula which I give you in this link
Profit booking Formula in mutual fund growth fund or dividend reinvestment fund SIP
and reinvest this profit booking in same fund like dividend reinvestment then share your result with me.
and why you increase SIP amount in same fund If you have separate money then make a fresh SIP in China or Japan fund for diversified your portfolio.

Rahul Gupta said...

OK sir that time I was not aware... I increased the amount. Now I have two sip one is hdfc top 200 and another one is axis long term equity fund.. I want one more sip it should be midcap fund or Japan or China fund.. I saw Japan or China fund not recommending any dividend.....and sir plz let me know the best midcap dividend paying fund and one elss fund. Thanks a lot sir

Mahesh Chander Kaushik said...

New funds not recommended dividend in there starting years but once they establish then they pay it regularly.
Ok if you want midcap dividend paying fund then please describe in brief that you want to choose in international fund or indian fund?
for ELSS read this article
Top ELSS

Praveen Kumar said...

Sir I already subscribed to Icici elss scheme with growth option . can I change it to dividend option now ?

Mahesh Chander Kaushik said...

Praveen sir,
most of Elss not allow to choose dividend option.
when you open a new SIP/ invest fresh amount in mutual fund except elss.. then choose dividend reinvestment instead of growth,
Regrds

One who is at a Crossroad said...

Dear Maheshji,

Thank you for such a wonderful service. I would like to invest 25k for long term in a Dividend fund (as recommended by you in this article).
1) My first question is would you recommend going with HDFC Equity Fund (with Dividend Scheme). Do they normally send me the dividend.

2) How does dividend reinvestment work? Do they send me the dividend and then I buy more units of the same fund or I can indicate that I want my dividend to be reinvested.

3) I am also planning to start SIP in another mutual fund. Which one would you recommend? Should I keep the SIP separate from the above lumpsump dividend plan.

Once again thank you for doing such noble work.

Keyur Shah said...

Dear Maheshji,

Thank you for such a wonderful service. I would like to invest 25k for long term in a Dividend fund (as recommended by you in this article).
1) My first question is would you recommend going with HDFC Equity Fund (with Dividend Scheme). Do they normally send me the dividend.

2) How does dividend reinvestment work? Do they send me the dividend and then I buy more units of the same fund or I can indicate that I want my dividend to be reinvested.

3) I am also planning to start SIP in another mutual fund. Which one would you recommend? Should I keep the SIP separate from the above lumpsum dividend plan.

Once again thank you for doing such noble work.

dhaval said...

Really stunned by your revelation of such a big difference in returns. All my life i was taught and told that growth option is better than dividend re investment option.

Just a request from my side. Have you tested this live with actual investment and not an excel working.

By what you say dividend reinvestment option in the case you mentioned has given a CAGR of 34% which is much higher than usual 20% which equity is known to give.

Mahesh Chander Kaushik said...

Sorry to keyur shah and dhaval for late reply.
First reply to keyur shah:-1. Dividends are not guaranteed in nay scheme.2. You can give an instruction about dividend re-investment when you buy fund units then your mutual fund company do not sent you dividend they allot you fresh units instead of dividend payout.
3. Yes if you choose a separate folio for each.

Second reply to dhaval:- 1. I am not tested it live it is just and excel working.
2. Yes, CAGR is higher because as I mention in article that dividend reinvestment give us triple benefits first profit booking in dividend form second SIP as dividend reinvestment third compounding.

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