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Understanding dividend payout and growth option

Dividends and NAV of payout option cannot match NAV of growth option because they miss out on the power of compounding...

If an equity mutual fund has declared multiple dividends, I have observed that the NAV of the dividend option if added with all the dividends declared does not reach the Nav of the growth option. For example, the NAV of Reliance Growth Fund growth option is approximately Rs 470 and the NAV of its dividend option is approximately Rs 50. If we add the dividends declared till date (which are Rs 88) to the NAV of Rs 50, it is Rs 138. This is far less than the Nav of the growth option of Rs 470.
Why does this happen? I would have expected the NAV of dividend option and all dividends declared to be the same as the NAV of the growth option, which is not so. Why is there such a big difference between the two NAVs?
- Anonymous

You are ignoring one of the most basic difference between Growth and dividend payout option of a fund scheme.

In the growth option of a scheme you get units at the time of investment and the number of units remains the same until the end. The NAV changes according to performance of the fund. Investors with growth option earn returns when they sell their units at a higher NAV at a later date.

In the dividend option, the mutual fund will pay you from the profits made by the scheme at periodic intervals. What you need to understand is that a mutual fund dividend is not an additional benefit. The sum just gets deducted from the NAV of the fund and is paid to the investor. So you should see it as a periodic profit booking, and not as an additional gain. This option suits those who want some regular returns from their investments. For example, if a fund has NAV of Rs 50 and declares Rs 2 dividend, the fund NAV will reduce by the same and become Rs 48.

On the other hand in growth option, your investment has the power of compounding. The profits made get added to the NAV and keep compounding over time.



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