AUTOMATIC REINVESTMENT:
A mutual fund gives return in two ways – dividends and an increase in value. The latter can be utilized only when you sell the mutual fund unit.The dividends, however, are accessible as soon as they are distributed. As an investor you can use this in two ways – reinvestment or payout. When you choose the payout option, the dividend amount will get credited in your bank account. In case of reinvestment, the dividend amount will be utilized to buy more MF units of the scheme.
The automatic reinvestment option is a service the fund house provides to shareholders, giving them option to purchase additional shares using dividends automatically.
CAPITAL GAINS DISTRIBUTIONS:
Apart from dividends, mutual funds also distribute the profits it makes from selling some of the underlying assets at higher values. This is called capital gains distribution. This can also be used to buy more MF units (reinvestment).COMPOUNDING
When you invest in a financial asset, you earn on the amount invested. Over time, you can either reinvest this amount or put it in a bank account. Either way, you earn some amount on your existing profits – either through investment returns or from bank interest. Thus, your total returns over time increase. This is called compounding. Over time, compounding can produce significant growth in the value of an investment.
For example, you invest Rs 1000 today and earn Rs 100 profit a year from now – a return of 10%. You decide to reinvest this amount too. The next year, a return of 10% gives you Rs 110, not Rs 100. The greater the frequency of investment or interest payments, the higher is the effect of compounding.
DEPRECIATION:
This is the decline in your investment’s value in the mutual fund. This means, you will make a capital loss when you sell the mutual fund units. It is just the opposite of ‘appreciation’.
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