Mumbai: There is the presence of a dividend reinvestment option that is present in mutual fund schemes. The question for a lot of people is the time when this route should be selected because if they want a dividend then it would be better to opt for the payout option and if there has to be accumulation of money then the growth option comes into play.
There are however situations when selecting this route would actually make sense for the investor and hence they have to be ready to make the right use of the choices in front of them. Here is a closer look at the issue and how investors can ensure that they are able to gain from the choice available to them.
Nature of option:
The dividend reinvestment option is one where there is a dividend declared for the investor but they do not actually get to see the amount into their bank account. This happens because the figure is actually reinvested into the fund and new units are allocated for the purpose.
This will ensure that the number of units in the fund rise for the investor and hence their money is compounding in the investment rather than being withdrawn and used for some other purpose. Under this type of plan the investor ends up with more units after each dividend declaration because the amount gets reinvested.
No cash requirement:
This is suitable for someone who does not have any requirement for cash in their investment plan because the dividend here does not come to the investor into their bank account.
Rather what the investors actually witness is simply a book entry wherein they are shown to have earned the dividend according to the rate of dividend and the number of units held but then the same amount gets converted into more units at the applicable value. This is crucial as otherwise under the dividend payout option the investor would actually find that they are receiving the cash from the dividend.
Applicable NAV:
The key part here is the Net Asset Value (NAV) at which the units will be allocated and this will be the figure after the dividend has been declared. This means the reduced figure as the NAV will adjust for the dividend that has been declared and this is how it should be because this is the right way to go about the process. What is significant is that the investor also benefits from this move because at a lower rate they will end up getting more units for the amount that they will have reinvested and hence is something to consider.
Growth option comparison:
The significance of the investor will also arise from the fact that there should always be a comparison for them between the growth option and the dividend reinvestment option. The growth option has to be selected when the investor does not want to look at their investments for a long time period and hence they can allow it to accumulate.
On the other hand if they want to withdraw some amount at some points of time then the dividend reinvestment option would be more suitable because this will also reduce the capital gains that would arise as the NAV keeps adjusting for the dividend and hence this will keep the capital gains in check.
However if the fund is an equity one and there are just long term capital gains if the investments are held for over a year then this would not make much sense and hence it might be better then to go for the growth option.
