Few Things You May Not Aware About Mutual Fund Dividends –

Origin of this article is in the following e-mail received by one of the blog reader –

Dear Paresh,

I landed on your blog saving-ideas searching for performance of few mutual funds. I have few old investment, mostly in ELSS schemes dividend options.In general, I have found that performance of Growth options is much superior than that of dividend mode..I have invested in HDFC Tax saver,ICICI Tax saver and Sundaram Tax saver and similar phenomenon for all these three funds.Now I want to switch these funds to Growth mode.So please advice me how can I do that.

With regards,

Rahul.

He has compared returns of growth option with dividend option.Most of the readers may aware of the facts about how dividends work in mutual funds.Till, listed few facts about the same.

1. NAV Correction after dividend payout – Rahul in his above comment wish to know the reason of under performance of  dividend option.This is not the undeperformance but it happened due to NAV reduction after dividend is paid out.NAV will be reduced in the same proportion as dividend is paid. Till dividend is not paid performance will look similar in both the cases.
2. No 80C benefit for dividend reinvested in ELSS schemes – This is real agony as units received through dividend reinvestment in ELSS scheme goes into 3 yr lock in period but investor can not claim 80C benefit against it.So never opt for dividend reinvestment option in ELSS schemes.
3. No Exit loads on dividend reinvested – This is  for Non-ELSS schemes.Units received through dividend reinvested are free from exit loads.
4. Dividend to Growth conversion – One can convert dividend option to growth option in mutual funds.Just use Switch option to do that..but in case of ELSS schemes, investors can’t make any switches till completion of lock in period.