Growth or Dividend?

This is a question any mutual fund investor should ask himself. Should I opt for the growth or the dividend option? Also, does dividend re-investment make any sense whatsoever?

If you leave this to your advisor (in most cases the salesman), he will chose one almost randomly. In fact he does not really care as his commission/fee is not dependent on this. You have to make the choice based on your requirements.

• In the Growth Option all returns from the assets held are simply ploughed back in. You get no dividends, and appreciation is basically seen in the NAV going up. If you are looking at long term asset appreciation and are not dependent on the income being generated by your investments for your expenses, go for the growth option.
• The Dividend Payout Option basically gives you any asset appreciation in the form of dividend. If your investments are your source of income, then dividends will come in handy.
• The Dividend Re-investment Option gives you the dividend, but basically invests it back into the fund. This option makes absolutely no sense to me. In fact when you are redeeming, you may end up having to pay for short term capital gains on the units that you bought from the dividend. Unless our tax laws change (and I cannot imagine how) this option is totally useless. If you are even considering this, simply go for the growth option.

Another factor to consider is your investing approach. Conservative investors who would like some investments in relatively higher risk assets, may want to get dividends from the higher risk assets and invest the proceeds in a debt/income fund or their bank deposit.

In theory, any option you choose should give you identical results. In case you choose the dividend payout option, returns would obviously depend on what you do with the dividend income.

Punjab and Sind Bank IPO

Did you not apply for the Coal India IPO? Did you miss out on the big money people made on it? Have you applied for the PSB IPO?

I did not apply for Coal India, but I did apply for the PSB IPO. I am not a big fan of PSUs, or any company that is basically state owned, so I was never keen on either. Looking at the the prospectus for PSB, there is a huge list of risks, including a few civil cases and IT cases.

As it is, there is nothing in this IPO that would attract one to buy it for the long term, but the fact is there appears to be some money to be made on almost any IPO listing, especially a nationalised bank. So I have applied for some shares, which I intend to sell off at the first reasonable opportunity. The fact that this IPO is oversubscribed almost 50 times, I am not too optimistic I will get too many shares, but it's worth a shot!

Building the Core Portfolio

Here is what I have decided I need on my core mutual fund based portfolio: Some balanced funds, some large cap and maybe some mid cap funds. The balanced and large cap funds should provide the stability and the mid caps should provide the growth.

Value Research Online is an excellent source of information when it comes to mutual funds in India and general personal finance tips. It is on the basis of its categorisation and rating that my fund selection is largely based on.

Anyway, here is my list:

1. Balanced: HDFC Prudence Fund. This is a fund that has been going strong for more than a decade and has provided excellent returns to its investors.
2. Large Cap: Franklin Bluechip and DSP Black Rock Top 100. The Bluechip fund is one that I have personally held for more than 6 years and has proven to be a good, stable investment. The DSPBR Top 100 is not a fund I have invested in, but has a solid track record over the last 7 odd years.
3. Large and Mid Cap: HDFC Top 200. This is not a fund I hold, but has been on my radar for quite a while now. Since its inception around 13 years back, this fund has been an outstanding performer.
4. Mid and Small Cap: Reliance Growth.
5. Multi Cap: HDFC Equity.

The last 2, in fact the last 3, are what I am hoping will give a boost to the portfolio. The primary reason to stick with Reliance Growth and HDFC Equity, despite the  fact that they are not rated too highly, it that I've held these for a while now and they have not disappointed. Also, I do not want worry about short term capital gains in case I have to redeem to buy house in the near future.