Growth or Dividend

As we all know , now that market has corrected and Sensex has tipped, this is the right time tio invest in various Mutual Funds. The fundamental is simple, now the NET ASSET VALUE that is the per unit price of Mutual funds is all time low . So you can purchase more units right now. However,lot of people are in dilemma whether to invest in Growth option or Dividend option. Moreover which sub option of Dividend . Let me try and solve that dilemma for ever. Lets use an example to help us explain the same. Today Say XYC AMC launches A product names “ABC FUND”. Now during the New Fund offer the units are sold at a price of Rs 10. Now Ram and Shyam both invest Rs 5000 each in ABC fund. Ram in Growth and Shyam in Dividend. So Ram has got Rs5000/ Rs 10= 500 units Shyam Has got Rs5000/ Rs 10= 500 units Now , after 6 months the Fund Manager of ABC Fund decides to declare dividend at the rate of 20 % that is Rs 2 per unit when the current Net Asset Value or NAV would be Rs 12. Now Ram’s investment before dividend is declared= 500 units xRs12=Rs 6000 Now, shyam’s investment before dividend is declared= 500 units xRs12=Rs 6000. After dividend is declared : Ram ‘s investment would be= 500 units xRs 12= Rs 6000 Shyam’s Investment will be= 500 units xRs 10= Rs 5000 However Shyam will get dividend at the rate of Rs 2 per unit= Rs 2x500 units= Rs 1000 Now, as dividend is declared at the rate of Rs 2 his Nav has comedown to=Rs 12-Rs 2= Rs10. So , in effect Ram holds investment worth Rs 6000 Shyam holds investment worth Rs 5000 and gets an inflow of Rs 1000 as dividend. So , you see no one is a loser. Only difference is Shyam is getting cash inflow in terms of dividend which is eroding his appreciation. In case of Ram his appreciation will keep on accumulating till the day he withdraws his funds.So we can say it is a matter of choice as in whether he wants the appreciation to be paid out to him in intervals or he wants the whole chunk in one go. If an investor wants a regular flow of periodic income then he should go for dividend, otherwise Growth. Now, the question arises that if an investor is going for Dividend Option, should he go for DIVIDEND PAYOUT DIVIDEND REINVESTMENT Now in the above scenario Shyam wanted a periodic influx of funds and hence opted for Dividend Payout. However many people who want to increase their units purchased would opt for Dividend Reinvestment.In case of dividend Reinvestment instead of paying Rs 1000 to Shyam units worth Rs1000 would be reinvested in his existing investments. So units will get reinvested in his folio = Rs 1000/Rs12=83.33 units.