The reality is that under the dividend option the fund keeps on declaring regular dividends and no such payments accrue under the growth option might suggest to some investors that the former is better. On the other hand, if we compare returns from a dividend reinvestment scheme to that of a growth scheme, there would be no distinction in the final returns.
However in case of the dividend payout there would be some difference because the money is returned to the investor in the form of cash. This will purely depend on what the investor does with this cash she/he obtained through dividend payout.
In addition, there is one more very relevant issue. In an ELSS (Tax saving mutual fund where you cannot withdraw money before 3 years from the date of investment) scheme, if you select the dividend reinvestment choice you will be protected in for life.
In this kind of option, instead of paying money to you in the form of dividends the mutual fund puts back the same amount in the same scheme and gives you equivalent number of units.
The main reason to this is that when the dividend is reinvested new units are issued. These units would be protected in for a further three-year period from the date of issue (remember this is an ELSS scheme with a three-year lock-in period).
See Also: Types of Taxes in India
And as dividend continues to be given within the next 3 years on the new units you received, you will find yourself protected in for lifeA mutual fund generally offers two kinds of schemes: dividend and growth.
The dividend alternation does not re-invest the profits made by the fund though its investments. As a substitute, it is given to the investor from time to time. In the growth scheme, all profits made by the fund are ploughed back into the scheme. This causes the NAV to rise over time.
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