Many investors get confused with this and are easily fooled by mutual fund agents. Dividend in stock market and mutual funds are different concepts. In stock market, the company declares a dividend from the profit they earn, and you get an additional income. However, in mutual funds, dividend option does not mean you earn any additional return, it simply means withdrawing a part of your money.
For example, you invest 10 Lakh Rs in mutual funds and it becomes 12 lakhs in a years’ time, you will be given a dividend of 1,00,000 Rs and your NAV will be reduced. You are not earning any additional income; it is similar to withdrawing part of your accumulated profit.