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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  1. Really ? Lets say a MF fund has 1 year lockin period. Every dividend you get locked in for another year (assume you have selected reinvestment option) and you can NOT take out your money ever since you always get lockedin perpetually. I am getting tired of people telling me always select Dividend Reinvestment option.

    You have also ignored No Tax for dividend VS 15% tax for cashing out within a year.

    In short: always is misnomer

  2. I have been reading your blog for many months now and got lot of value. Closed my LIC endowment plans, started investing in MF, making corrections and cutting fluff in my finances( saying no to almost any new CC s). I listened to your Chennai-Mylapore Session videos and told my cousins who just started earning and in their 20 s. It is creating some ripples – thinking / rumination on finances / action on investing in my family. Thanks for that. Now, whenever I think about retirement planning after reading your blog (and Pattu and other such blog) I am left with a sense of fear (I am not dismissing whatever you are saying that old age without money is painful etc)and I think that fear is good for now. Now the work to done is to have ‘systems’ in place such that retirement money is taken care and concentrate on my hobbies and what I want to do. Also I have been reading a personal development blog for lot of years and provided lot of clarity and his take on Retirement Planning …seems…to give a sense of freedom.
    Retiring Wealthy without Money:
    http://www.stevepavlina.com/blog/2015/06/retiring-wealthy-without-money/

  3. Vishnu you really read, understood the post and then shot off your comment?

    he is clearly saying opt for GROWTH – or you do not know that Div Reinvestment is different from growth option?

    Subra we need some editing and censorship please…

  4. sir nowadays those glory days are gone
    nowadays i barely get to buy handful of shares with the dividend received. prices have gone up so much

  5. Uma you have always been saying that I need an edit policy, and I have been saying no. There are many readers who come and correct what nonsense some other readers say. I am taking the PV Narasimha Rao philosophy of keeping silent. It works.

    Vishnu can see your post and feel whatever he wants…why should I bother?

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