Dividend reinvestment option


I am looking at ELSS investment options but everyone suggests told to avoid dividend reinvestment option. Why is that?


ELSS funds offer both growth and dividend option but it is better to avoid the dividend reinvestment route. The reason that many people advise you against opting for a dividend reinvestment option is that ELSS considers each investment as a fresh one. So all dividend which is reinvested will come with a further lock in period of 3 years for each new investment. This can limit your flexibility at the time of redeeming your money from the fund after the mandatory 3 year lock in period.


An NBFC I frequent is offering loans on mutual funds. I thought only banks were allowed to offer loan on securities. Can a NBFC offer loan against mutual fund?


While almost all banks offer loan against mutual funds, as per the guidelines of the Reserve Bank of India non banking financial companies of NBFC’s with assets of more than Rs. 100 Crore can offer such a loan. Mutual fund loans are available for both equity and debt funds just like banks, the approved non banking financial companies also have a list of approved funds which they consider for loan


Hi Sourav,

When you choose the dividend option for your Mutual Fund, you will receive dividends that are declared from time to time by the Mutual Fund. You will also have capital appreciation, if any, when you decide to sell the Mutual Fund. In case you choose the growth option, you will not receive any dividends but will get capital appreciation. You have to understand that the profits that the fund receives is distributed as dividends under the dividend option while it is retained within the fund in case of the growth option. Dividend reinvestment is when the dividend is declared and reinvested in the fund. So, the dividend will be reinvested at the Net Asset Value (NAV) of the Mutual Fund on the date the dividend is declared. This might not be a great thing because you cannot time this reinvestment. Also, in case of ELSS funds, every investment that you make will have a lock-in period of 3 years. So, it is best to go for either the growth or dividend option in case of ELSS.

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BB Expert