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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