Dhirendra Kumar says what purpose is serviced by dividend reinvestment plans and how does it work
06-Apr-2017 •Research Desk
Answer transcript: None. Initially, most funds had dividend plans. A lot of investors decided they didn't want dividends and so growth plans were introduced. For investors who chose dividend plans but don't now want dividends, the reinvestment of dividends effectively converts their plan to a growth one. Most equity investment is meant for the long term and the idea is to accumulate capital over time rather than get periodic income. You should hence choose a growth plan.
If you have chosen dividend for some reason or you didn't appreciate this logic earlier and now you realise it, giving an instruction to change from dividend to dividend reinvestment will happen seamlessly because this is a non-financial transaction. On the other hand, if you want to convert dividend to growth, this will amount to redeeming your investment from the dividend plan and making a fresh investment in the growth plan. Instead, with dividend reinvestment plans, the dividend will be reinvested in the fund without any load and the plan effectively becomes a growth plan.