Religion is the opium of the masses and dividend is the opium of investors.
Caution: Several hybrid / balanced mutual fund schemes are sold with the promise of a monthly dividend. Beware of such schemes and offers. In my view, they are equivalent of ponzi schemes, using money received from new investors to pass on as dividends to older investors, pocketing the fee in between.
When I ask an investor, “why are you choosing dividend option in your schemes?”, he replies:
“Dividend shows that the fund is working and is producing returns.
In fact, if I choose dividend reinvestment, which increases the number of units and hence the overall value of my investment.
With dividend payout, I get to decide if I use the money or reinvest it.”
Not just him, several other investors fall for this dividend trick, sometimes themselves, sometimes because it was recommended to them.
Mutual Fund Dividend for all the wrong reasons
Reason #1
There is the old belief that dividend option helps you save tax.
Yes there used to be a time when choosing a dividend option gave you additional tax benefits but not anymore.
Reason #2
“See your fund has declared a dividend.”
A reason, I guess, distributors push this option to investors is to make the investor feel good with a cash flow that s/he gets. That’s perception management.
Reason #3
Finally the investor thinks, if the dividend is declared, the fund must be making money.
The incoming cash flow looks attractive. Some of us still equate a mutual fund with a stock.
Total sham!
So, no mutual fund dividend at all?
If you are building an MF portfolio for the long term, simply go for the growth option. The growth option works totally in sync with the power of compounding.
Only, if you are seeking dividend income out of your mutual fund portfolio, you may go for the dividend payout option. However, be cautious of your scheme selection then.
There is absolutely no sense in opting for Dividend Reinvest option. All it does is create several transaction entries and unnecessary accounting hassles. And worse, it interferes with the power of compounding.
What do you say? Yes dividend or No dividend.
Let’s make a discussion. Share your views in the comments.
Once again you’ve busted the myths surrounding dividends in a simple manner.
It’s important for investors to understand the effect on compounding on our capital and dividends can take the sheen off it in the long run.
My experience with dividend income is that I’ve personally never been able to reinvest the and hence prefer growth option.
Thanks agani Vipin! You have been honest in your confession. Most people can’t deal with money rationally – Shopping is the first word that comes to mind than investing.
Hence,
greedgrowth is good!