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