Apr 13, 2015 01:44 PM IST | Source:

Why MF dividend gets reinvested instead of reaching you

In some cases the dividend announced on an investment in mutual fund does not comply with the norm of minimum dividend amount, which can be paid out. Hence even if one chooses to invest in dividend payout option, the dividend is reinvested in the same scheme.

Why MF dividend gets reinvested instead of reaching you

Arnav Pandya
Financial Advisor

Mutual funds offer various options under the dividend plan for their investors and this is mainly the dividend payout one and the dividend reinvestment one. The difference between the two is in terms of the receipt of the amount after the declaration of dividend. However there can be circumstances wherein the investor might be forced to accept one of the options even though they have chosen the other option. One has to look carefully at the conditions when this would occur and hence here is a detailed analysis of these conditions.

Nature of options

The idea behind choosing a dividend payout option is that as the name suggests there will be a receipt of the amount that is declared as dividend when this is selected. This is done when the investor wants to ensure that they have requirements for the amount of dividend in cash and hence would not like to keep this locked up in the mutual fund. The way this works is that after the dividend is declared and based on the units held the specific figure of the dividend would be deposited in the bank account or a cheque for the same would be received by the investor and they can then deposit this in their bank.

Under the dividend reinvestment option there is nothing that the investor has to do as the dividend will be declared by the mutual fund and then they would be allotted new units for the amount of dividend that they are entitled under the fund. This is meant for investors who want to ensure that they are regularly building up their investments and do not have a need for cash from the dividend earned in the fund. The more units will ensure that the benefit of compounding is also available to the investor.

Change in option

There are some times when the mutual fund might not honour the option that the investor has chosen and the investor would be forced to take the other option. This can happen for example if the investor has taken the dividend payout option but still they find that there is a dividend reinvestment that has taken place. This should not happen because the instructions of the investor are very clear in this matter but there are circumstances when the investor would have to accept the conditions and allow for the change to take place.

This usually happens because there is a condition that is present in the fine print of the mutual fund schemes and this is that for the dividend payout to actually occur there has to be a minimum amount of dividend earned. There are situations wherein the dividend payout is very less and which could be even less than say Rs 100 or Rs 200 because the investor has just started investing in the fund or that the investment amount is very low and hence there is not a larger dividend coming to the investor. If this amount of dividend payout out falls below the threshold that has been specified then the fund will compulsorily reinvest the dividend.

Dealing with the situation

For the investor they need to know the minimum amount of dividend that has to be present for the payout to occur. It could vary between mutual funds and hence checking the figure that is applicable for their investment would be important. This is significant because otherwise they might be under the false impression of receiving a dividend which would not be a reality. The investor also needs to check their investments and the kind of dividend that they would be earning. Overall for this small amount of dividend it might not make much of a difference to a bigger investor but for very small investors who might have been hoping for a payout they would need to take this condition in their working.

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