June 07 , 2012
In dividend option of mutual funds, any rise in value of the fund is removed from the fund and assigned for payment to the investor. They may be actually paid out, or may be ploughed back into the fund. If paid, this transfers the gains to the investor. It is called as Dividend Payout option. If not, it is reinvested in the fund and is called Dividend Reinvestment option.
The payout option is somewhat like periodically going to the bank and taking out your interest earned. In either case, you are very likely to spend it, so you may not want this option unless you really need the money! It seems bizarre as to why you would take the dividend and put it back immediately in the fund (reinvestment), but there are a few practical reasons for this, quirky tax laws being one of them.