A dividend reinvestment option will give you more units than a growth option. But the latter will have a slightly higher NAV. A reader questions whether it makes any difference at all
08-Mar-2007 •Research Desk
I have a question with respect to growth v/s dividend reinvestment option. While I was deciding on which option to choose, my broker suggested that I go for dividend reinvestment. He said it is better to have more units rather than higher NAVs of a growth option. Technically, I see no difference as the value of underlying investments in stocks remains the same. However, I was just wondering whether lower NAVs are better from a behavioural point of view i.e. are retail investors deterred from investing in a fund which already has a high NAV? More generally, should the magnitude of NAV of a fund matter when I choose which fund to invest in?
You are absolutely correct. The NAV is immaterial while choosing a fund. Moreover, there is no difference between the growth and dividend reinvestment options in terms of total returns. One must remember that NAV is different from the price of a stock. A stock's price, unlike NAV, is influenced by the forces of demand and supply, external factors such as perception and investor sentiment.
The reason you should buy into a particular scheme is due to its performance potential and not its unit cost. Say you purchase one fund with a high NAV and another with a lower NAV, but more units. Assume both perform similarly, upon selling the two funds, the return on investment will be similar. Hence whether the NAV is high or low, or whether you get more units or less units, is irrelevant. What matters is the investment style of the scheme and the returns it generates.