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Yogi Zone

Useful articles for your finance management by our team of experts

Investment Options for Equity Mutual Funds

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Mutual fund options

There are many investors who are puzzled to select fund options while investing in equity mutual funds. They don’t understand the basic difference between Dividend Payout, Dividend Re-investment, Growth or Bonus options. So, let’s focus on these mutual fund concepts in depth. This will help to make an informed decision while investing.

Dividend Payout Option - In Dividend Payout Option the fund declares dividend to their investors from time to time. As, you can observe in Illustration 1 given below:

Illustration 1:

An investor invests Rs 50,000 on 2nd Jan, 2006 in the HDFC Equity Fund (Dividend) payout option. On a regular basis the fund pays out a certain percentage of dividends to investors. On 30th June, 2010 the fund generated returns of 90.01% adding up total dividend payout and total appreciation in invested amount.

Scheme: HDFC Equity Fund (Dividend)   

DateDividend PayoutAmount Invested (Rs)NAVUnitsDividend Payout (Rs)Balance UnitsTotal Value (Rs)
02/01/06Initial Investment50,00036.341375.89-1375.8950,000
17/03/0650%-41.88-68791375.8957,622
07/03/0750%-40.35-68791375.8955,517
07/03/0855%-45.45-75671375.8962,534
19/03/0930%-23.25-41281375.8931,990
25/03/1040%-46.95-55041375.8964,598
30/06/10--46.55- 1375.8964,048
 Total Dividend Payout30,958
Total Returns95,006

Source: Mutual Funds India

Now, it’s upon you as an investor to invest the dividend returns for future consumption or utilize it for your regular expenses. But, InvestmentYogi recommends you re-invest the dividend payout for future consumption.

Dividend Re-Investment Option – In Dividend re-investment option the fund declares divided on regular basis, but it’s re-invested into the same fund. So, from that amount new units are purchased for an investor. As, you can observe in Illustration 2 given below:

Illustration 2:

An investor invests Rs 50,000 on 2nd Jan, 2006 in the HDFC Equity Fund (Dividend) Re-investment option. On a regular basis the fund declares a certain percentage of dividends to investors and they are re-invested into the fund by buying new units at prevailing NAV. On 30th June, 2010 the fund generated total returns of 102.21%.

Scheme: HDFC Equity Fund (Dividend)

DateDividend ReinvestmentAmount Invested (Rs)NAVUnitsDividend Payout (Rs)Balance UnitsTotal Value (Rs)
02/01/06Initial investment5000036.341375.89-1375.8950,000
17/03/0650%687941.88164.2701540.1664,502
07/03/0750%687940.35170.4901710.6669,025
07/03/0855%756745.45166.5001877.1685,317
19/03/0930%412823.25177.5302054.6947,772
25/03/1040%550446.95117.2202171.91101,971
30/06/10--46.55--2171.91101,103
 Total Returns101,103

Source: Mutual Funds India

Comparison between returns of Dividend Payout and Dividend Re-investment option – There are higher returns in the dividend re-investment option as you have analyzed from Illustrations 1 and 2. This was possible because the investor re-invested the dividend declared amount into the scheme for buying new units. This generated higher return on their investment, compared to dividend payout option. By investing in the same fund for same period of time they have generated 6.41% higher returns by investing in the dividend re-investment option, compare to dividend payout option.

This was considered only for investing in one mutual fund scheme. An investor basically invests into multiple schemes. Now, if you have opted for dividend payout in all schemes then there will be much higher losses.

Growth Option – In growth option, you will not receive any payout, but the value of your holdings will be appreciated in the long term. The returns keep on fluctuating based on the net asset value of a fund. As, you can observe in Illustration 3 given below:

Illustration 3:

An investor invests Rs 50,000 on 2nd Jan, 2006 in the HDFC Equity Fund Growth option. The invested amount buys units in this particular scheme. Now, on 30th June, 2010 the fund generated total returns of 136.3%. In growth option there is no dividend declared. The return from a fund is completely dependent on net asset value into number of units at any given point of time.

Scheme: HDFC Equity (Growth)

DateAmount Invested (Rs)NAVUnitsBalance UnitsTotal Value (Rs)
02/01/0650,000107.19466.46466.4650,000
17/03/06-123.52-466.4657,617
07/03/07-135.17-466.4663,052
07/03/08-173.18-466.4680,782
19/03/09-100.8-466.4647,019
25/03/10-233.86-466.46109,087
30/06/10-253.29-466.46118,150
 Total Returns118,150

Source: Mutual Funds India

Comparison between returns of Dividend Re-investment and Growth Option - The dividend re-investment option fund declares dividend payout, but they are reinvested into the scheme to buy new units at prevailing NAV. On the other side, in growth option there is no dividend payout option. The amount is invested to buy the units in particular scheme.

In growth option, the returns fluctuate with net asset value. In the long term there are higher returns in the growth option which is well illustrated by comparing returns of Illustrations 2 and 3. Growth option generated 16.86% higher returns compare to dividend re-investment option.

Bonus Option – There are few mutual fund schemes which give the option of bonus. In this, the asset management company decides to declare certain units as bonus to their investors. It can be anything such as 1:2, 1:5, 1:10 or any other ratio. In Illustration 4, we have assumed the NAV and bonus declared for Reliance Pharma (Bonus) fund to understand this option.

Illustration 4:

An investor invests Rs 50,000 in the Reliance Pharma bonus option. The bonus assumed is 1:10 in this scheme. Now, this fund has declared bonus units in the 1st and 2nd year after initial investment. This has reduced the NAV after bonus and has increased the holding of units in the hands of the investor. In the event, the 3rd year investor decides to exit from this fund and manages to generate returns of 69.4%.

Scheme: Reliance Pharma (Bonus)

YearInvested Amount (Rs)NAV (before bonus)UnitsBonus UnitsTotal UnitsNAV (after bonus)
150,000501000100110045.45
2-601100110121041.32
3-701100-1210-
 Total ReturnsRs 84,700

*Assumption: Bonus units declared 1:10

Tax Implication – The funds such as diversified, sector or balanced which invest into equity of companies with holding of 65% or more are considered as equity mutual fund schemes.

  • Dividend income from an equity oriented fund is tax-free.
  • Exit from a mutual fund scheme within a year of investment will impose 15% short term capital gains tax.
  • Exit from a mutual fund scheme after a year of investment is considered as long term investment which implies no tax on capital gains.

By, now you would have understood the concepts and differences between Dividend Payout, Dividend Re-investment, Growth and Bonus options. So, don’t confound yourself with mutual funds terminology. Be clear with your investment goals and opt for right equity fund options considering all the aspects discussed.

Written for InvestmentYogi by Hiral Thanawala

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