Thursday, 22 October, 2009

Fw: Why you MUST prefer the Dividend Option while investing in Mutual Funds

Why you MUST prefer the Dividend Option while investing in Mutual Funds

Most investment experts tend to recommend the Growth option while investing in mutual funds, except for those who "supposedly need" periodical inflow of money in their system. I'm yet to meet any individual who can't find any use for any periodic inflow of money into one's system.

However, I differ from these self-proclaimed experts. I wish to affirm that the Dividend Option is Always superior to the Growth Option while investing in Equity mutual funds.

Let me talk with numbers and delve right away into the topic:

Initial Investment of Rs. 10000
Date
Assumed Sensex level
NAV - Growth Option
No. of Units Bought / Held
Present Value
NAV - Dividend Option
No. of Units Bought / Held
Present Value of Units Held
Dividend Received per unit
Cumulative Dividend Received 
Total Present Value
 
                   
01-01-10 16000 10.0000 1000 10,000 10.0000 1000 10,000.00 0 0 10,000
01-04-10 17500 10.9375 1000 10,938 10.4375 1000 10,437.50 0.5 500 10,938
01-07-10 16800 10.5000 1000 10,500 10.0200 1000 10,020.00 0 500 10,520
01-10-10 18000 11.2500 1000 11,250 10.2357 1000 10,235.71 0.5 1,000 11,236
01-01-11 17400 10.8750 1000 10,875 9.8945 1000 9,894.52 0 1,000 10,895
01-04-11 19000 11.8750 1000 11,875 10.3044 1000 10,304.37 0.5 1,500 11,804
01-07-11 17600 11.0000 1000 11,000 9.5451 1000 9,545.10 0 1,500 11,045
01-10-11 21000 13.1250 1000 13,125 10.3890 1000 10,389.04 1 2,500 12,889
01-01-12 18000 11.2500 1000 11,250 8.9049 1000 8,904.89 0 2,500 11,405

As is very visible from the above table, investing in the dividend option is superior in a market with up & down movements for most time periods that one may wish to compare. The growth option is likely to be superior if and only if the market is consistently moving in an upward direction without an exception.

I've kept the above calculations simple so as to make it easy to comprehend.

For the more maths-friendly readers of this blog, I'd recommend that you rework the table with a minor modification:

  • Assume that you invest all your cumulative dividends that you receive during a quarter on the first day of every quarter if the NAV is below the NAV prevailing at the end of the previous quarter - And calculate the above returns.
  • You'll find that the dividend option is superior virtually for every time period that's worth comparing.
  • If you're even more mathematically inclined, you may also wish to rework the calculations by assuming that the dividends are invested in a typical liquid fund for the duration that it remains uninvested!

Secondly, I've just assumed a single one-time investment of Rs. 10,000/= in the above example. Imagine the cumulative impact of all your mutual fund investments that you've made in the past several years!

Talking about investments made in the past several years, do remind me to write about the Power of Compounding in one of my future posts. I'd love to write about it at least once a year without fail.

Regards,

N


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