Every scheme has two options - growth and dividend. After dividend is declared, the NAV falls. But the NAV in growth option does not fall. How is it possible?
In fact, most schemes have three options - growth, dividend payout and dividend reinvestment. Now when a dividend is declared in case of a dividend payout option, the dividend is paid to you and the NAV falls by the extent of such a payout. It is up to you to reinvest that money as you deem fit. In case of dividend reinvestment, the dividend is paid out by issuing additional units. Hence the dilemma of reinvesting your dividends is taken care of. In case of the growth option, no payout occurs and your gain is reflected in the higher value of the NAV, which you can encash at your convenience. Now if you are evaluating the returns from your investment at a point of time, there is no difference among the three options. The difference emerges in an implicit form with respect to the taxes applicable on the returns. In case of a dividend payout on account of an equity oriented mutual fund, no tax is liable. But in case of debt funds, a dividend distribution tax of 14.025 per cent (12.5 per cent plus cess and surcharge) is applicable, which is deducted at the time of payment of dividend. Hence, the burden of this tax ultimately falls on the investor.