What is a dividend reinvestment plan in mutual funds?
A Dividend Reinvestment Plan (DRIP) is a mutual fund option where the dividends declared by the fund are not paid out in cash to the investor. Instead, the dividend amount is automatically reinvested into the same scheme, resulting in the purchase of additional units at the prevailing NAV.
This approach enables investors to benefit from compounding over time, as the reinvested dividends increase the total number of units held, contributing to potential capital appreciation.
Key features of dividend reinvestment plans
- Declared dividends are reinvested into the scheme, not paid in cash
- Additional units are allotted at the ex-dividend NAV
- NAV may fall post dividend, but unit count increases
- Offers compounding benefits over the long term
What if...
| Scenario | Explanation |
|---|
| You need regular income | Reinvestment plans don’t offer cash payouts—opt for IDCW payout instead. |
| You want to increase your holdings | Reinvested dividends help accumulate more units automatically. |
| NAV drops after dividend | This is normal—the drop reflects the dividend paid, but unit count increases. |
| You plan to redeem soon | Reinvestment benefit is more visible over longer holding periods. |
Dividend reinvestment plans are ideal for investors who do not need periodic income and prefer to grow their investment through automatic compounding.
Last updated: 16 Jun 2025
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