Mutual Funds – All you need to know
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Dividend Reinvestment Option in Mutual Funds – Meaning Explained
Key Mutual fund Terms
The dividend reinvestment option is designed for investors who want dividends to remain invested rather than being paid out as cash.
Important characteristics include:
Automatic Purchase of Additional Units
Whenever the mutual fund declares a dividend, the payout amount is automatically used to purchase additional units of the same scheme.
Increase in Total Units Held
Instead of receiving money in the bank account, investors receive extra units in the fund equivalent to the dividend amount.
Participation in Future Growth
These additional units continue to participate in the fund’s future performance, potentially contributing to higher long-term returns.
Difference from Growth Option
n the growth option, profits remain within the portfolio without being declared as dividends. In the reinvestment option, dividends are declared first and then reinvested.
Convenience for Investors
The reinvestment happens automatically, eliminating the need for investors to manually reinvest the dividend amount.
Tax Considerations
Depending on current tax rules, dividends may still be taxable even if they are reinvested.
Investors shouldWhile this option helps keep funds invested, many long-term investors still prefer the growth option because it simplifies compounding and taxation.
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