Automatic Reinvestment Plan

By: EconomyWatch   Date: 23 November 2010

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Automatic reinvestment plan is a mechanism normally used by mutual funds that enable investors to buy additional shares using their dividends or distribution out of their capital gains. Automatic reinvestment plan also enable the one to electronically transfer his amount from one account to another. It can alternatively be defined as an agreement through which dividends from mutual fund or capital gains are utilized to buy additional fund shares.


Working principle

Individual can mechanically deposit his amount into his checking account through this automatic reinvestment plan mechanism. In this systematic plan, the fund manager reinvest the amount earned by the investor into his mutual fund account. Investors can get the added advantage by adopting this mechanism, as this will enable him to acquire more shares and at the same time they can avoid excess taxes. In automatic reinvestment plan mechanism, the capital gains produced by the fund can be utilized to mechanically buy more fund shares rather than dispensing these to the investors in form of cash.


Advantage from investors point of view

This automatic reinvestment plan enables the investors to acquire more investment gains, as after some period of time, the extra value produced by this automatic reinvestment can produce a significant amount.


Advantage from company's point of view

This automatic reinvestment plan can make a smaller company to a larger one, as through this mechanism, any capital and dividends made from the initial investments can enable the company to buy more shares in the fund and it is a continuing process.


Advice by experts

Investors should at first look at the prospectus and go through that section where there are matters about automatic reinvestment plan. Secondly, they should confirm the matter that their mutual fund is utilizing this automatic reinvestment facility. They can consult with the fund manager for further clarification. Investors should also discuss with the fund manager about tax liabilities etc.



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