Who Should Opt for Dividend Reinvestment Plans?ĭividend reinvestment plans reinvest the dividend distributed by the mutual fund. Tax On Dividend If You Fall Under 30% Tax Slab Original Units Purchased as of June 1st 2021ĭividend Reinvestment Amount (Dividend – 10% TDS)ģ37.5(1,500 units * 5 dividend per unit = 500)Now, dividend payable / NAV post dividend6,750 / 20 = 337.5ġ,837.5(Original number of units + Extra units acquired) Let’s understand with the help of an example, how the 3 mentioned plans are different from each other. Instead, the fund’s administrators automatically utilise funds to purchase additional fund units on behalf of the investors and deposit them to each investor’s account. When dividends are paid on the units in the fund, no cash is sent to the investor. Dividend Reinvestment Planĭividends that would have otherwise been distributed to fund investors are instead utilised to buy more units of the fund. A dividend payout plan’s NAV will be lower than a growth plan’s NAV. The dividends paid to the investors cause a decrease in the NAV of the dividend plan. Out of its profits, the fund declares dividends in a dividend payout plan. The value of a growth plan increases over time since all earnings generated by the portfolio are reinvested in the programme. There is no dividend payout in the growth strategy of a mutual fund. How do Dividend Reinvestment Plans Work?īefore understanding how the plan works, let’s look at the different investment options available: Growth Plan But, not all dividend paying mutual funds provide a Dividend Reinvestment Plan. In India, institutional investors such as banks, financial organisations, and insurance firms participate in dividend reinvestment plans. Individuals can also obtain similar advantages by investing in dividend reinvestment plans offered by mutual fund houses. However, even though you are reinvesting your dividends, they are still subject to taxation. Thus, if you’re a long-term investor, a dividend reinvestment plan may help you benefit from compounding with time. Through this plan you will receive additional units as dividends, and over time, you can accumulate more units of the mutual fund scheme.
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