Why discontinuation of Dividend Reinvestment option under ELSS is good for you?

That means there will be no more dividend reinvestment in the same scheme if dividend is announced. Instead, the Association Of Mutual Funds of India (AMFI) has suggested investors that they could opt to reinvest dividend in any other open-ended scheme of the respective mutual fund.

Feb 25, 2015 06:02 IST India Infoline News Service

Asset Management companies will now not give 'Dividend Reinvestment' option under the equity-linked savings schemes (ELSS). That means there will be no more dividend reinvestment in the same scheme if dividend is announced. Instead, the Association Of Mutual Funds of India (AMFI) has suggested investors that they could opt to reinvest dividend in any other open-ended scheme of the respective mutual fund.
 
Why the option is taken off?
 
The decision to take off the option from ELSS funds is made in the best interest of the investors. Any dividend reinvested is considered as fresh investment in the scheme, where any new unit invested in ELSS is locked-in for a period of three years. This means the amount reinvested as dividend is locked for a new period of three years; making it impossible for an investor to redeem all of his units at a certain point.
 
What should an investor opt now?
 
If opting dividend reinvestment in any other open-ended scheme does not appear viable to an investor, then he could choose from either growth or dividend payout options. However, growth option is an ideal one for investors due to its compounding benefits. Under this option, investors will not receive the benefit instantly but after completion of the tenure.
 
Investors who have selected dividend re-investment option
 
Those who have selected dividend reinvestment in existing ELSS investments could shift to dividend payout or take Dividend Transfer Plan (DTP) as both of the options have their own advantages. The dividend payout option will give freedom to invest the sum across any mutual fund house as against the restricted options available under DTP. On the other hand, a DTP will ensure that the dividend payout sum is not spent away but is reinvested in other scheme, which is selected as per risk appetite of an investor.

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