Forex

A mutual fund typically has three investment options — growth, dividend and dividend reinvestment.

At its launch, investors can buy a single unit of any mutual fund scheme at Rs 10, which remains the face value of the unit.

Each Rs 10 thus collected is invested into various kinds of securities. The value of these underlying securities at a given point of time decides the value of a single unit of the mutual fund, called the net asset value (NAV).

Depending on how well the investments perform, the NAV of a single unit can be more than or less than Rs 10. If the NAV of the scheme is greater than Rs 10, let us say Rs 15, then obviously we have a profit situation. The mutual fund share some of this profit with the investor from time to time by declaring a dividend.

The dividend is declared as a percentage of the face value, i.e. Rs 10. Hence, a dividend of 50% would amount to Rs 5 per unit. So, if an investor has 1,000 units of a mutual fund, he will get a dividend of Rs 5,000. After the dividend is given, the NAV of a single unit will fall by the same amount. If the NAV before the dividend is given is Rs 15, and a dividend of Rs 5 per unit is given out, the new NAV is Rs 10. Hence, the total value of the units reduces to Rs 10,000 (after Rs 5,000 dividend has been paid out).

In a growth option, no dividend is given out. Hence, the profits keep getting reinvested into the scheme. So, in the example, the NAV of the growth option, even after the dividend is given out continues to be Rs 15. The total value of 1,000 units would thus be Rs 15,000 (see table).

In the dividend reinvestment option, the dividend declared is reinvested into the scheme, at the revised NAV. So, if a dividend of Rs 5 is declared, this gets reinvested into the scheme at the revised NAV, which in case of our example is Rs 10. So if you get a dividend of Rs 5,000, 500 new units would be purchased. And the investor will now have 1,500 units amounting to Rs 15,000.