This is not an exaggeration. It is not another way of teaching you compounding. However when you read you will appreciate.
Let us assume that a young person has built up a portfolio of say Rs. 300,000 in equity mutual funds and he has opted for the dividend option. Every year he gets about 15,000 as dividend and that remains in the savings bank account. While doing his SIP he ignored this dividend and did a SIP based on his take home pay.
What happens to this Rs. 15k ? Nothing really. At the end of the year it is still sitting in the savings bank account and earning 4% interest.
Instead if he had opted for the GROWTH option, this Rs. 15,000 (technically a little more, a little amount has been lost to inefficiency in the dividend option – securities transaction tax) keeps getting added to the corpus. In the sense that the NAV keeps going up.
Similarly for a person with an equity holding portfolio – the dividends should be reinvested almost immediately. Assuming of course that he is young and living off his salary. So a person who has bought say 100 shares of Cholamandalam Investment and Finance company in 2010 for Rs. 65. He gets Rs. 500 as dividend in 2015 he should go and buy one share…this in the US is called DRIP (dividend reinvestment program). In this the company gives you SHARES instead of cash.
Not reinvesting the dividends and opting for dividend option (in equity schemes) is a real huge, terrible, massive mistake.
ALWAYS OPT FOR GROWTH OPTION. There is only one exception. In case you are short of cash to take advantage of 80C and you are investing only a portion of the Rs. 1.5L . In such cases use the dividend option so that the dividend is received in cash and you re invest – getting the tax benefit for the next year.
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