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Dividend Reinvestment Plans (DRIPs) for long-term wealth creation!

Is your money sitting idle? Unravel the DRIP magic for Long-term wealth!

drip

The Indian mutual fund industry has witnessed a growth in retail investor interest, with the value of assets held by retail investors increasing by 9.3% to reach Rs 23.4 lakh crore in January this year, according to data from the Association of Mutual Funds in India (AMFI).

Inflows in the mutual fund industry reached the highest level in three years, surpassing Rs 1.21 lakh crore in the first month of FY24. 

Recent data indicates that mutual funds have become a popular investment avenue, with 31% of Indians investing in mutual funds, while only 10% are investing in shares as of 2022.

So, are you also ready to enter the world of mutual funds, right? But the big question looms – which type to choose? Fear not, we’re taking a deep dive into one of the options you encounter while investing in mutual funds – DRIPs! 

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What are DRIPs?

Alright, let’s break it down. A DRIP is a Dividend Reinvestment Plan, and it’s the secret sauce behind making the most of your dividends. Instead of getting that cash in hand, you have two options:

  • Set up a DRIP directly with the company – they’ll reinvest the dividends for you.
  • Use your brokerage account to reinvest those juicy dividends.

When you own stocks, some companies reward you with dividends – a piece of their profits. Instead of pocketing those dividends, DRIP lets you use them to buy more shares. 

Now, you might be wondering, “Why should I embrace DRIPs?” If you crave the dual benefits of lower risk and the power of compounding, DRIPs are tailor-made for you. Compared to ultra-growth funds, DRIPs offer lower-risk investments while harnessing the magic of compounding. 

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How do DRIPs work?

You invest a certain amount in a mutual fund, and the fund declares a dividend. In a dividend payout plan, the fund’s net asset value (NAV) reduces by the dividend amount. But in a dividend reinvestment plan, the declared dividend is reinvested at the post-dividend NAV of the fund.

Here is a table on  the rundown:

 Growth PlanDividend PlanDividend Reinvestment Plan
As on January 1, 2022
NAV (in Rs.)202020
Units purchased250025002500
Total investment(in Rs.)500005000050000
As on December 31, 2022
NAV (in Rs.)252525
Units purchased250025002500
Total investment(in Rs.)625006250062500
Dividend declared on the dateNot ApplicableRs 2 per unitRs 2 per unit
Dividend paid to unitholdersNot applicableRs 5000Not applicable
Dividend reinvestment amountN.A.N.A.Rs, 5000
Post dividend NAV (in Rs)N.A. remains the same2323
Units issued for dividend reinvestmentN.A.N.A.217.39
No. of units post DRIPN.A.N.A.217.39
Value of investment post dividendRemains Rs 62,500Rs 57,500Rs 57,500

Benefits of DRIPs

Compounding Magic: DRIPs let you unleash the power of compounding. Those reinvested dividends buy more shares, which leads to more dividends, which buy even more shares… You get the drift!

No commission: DRIP lets you buy more shares without paying commissions or brokerage charges.

Discount rate: Some companies even offer sweet discounts of 1%–10% on the shares you buy through DRIP. 

Drawbacks of DRIPs

Dilution Concerns: DRIPs can lead to dilution of your ownership stake as the company issues more shares.

Diversification Dilemma: DRIPs can lead to overexposure to a single company. Balance is the key to a well-rounded portfolio!

Patience Required: DRIPs require a bit of patience. You might not get additional shares until the dividends are paid, which can be yearly or semi-annually.

Lack of Control: When you use DRIPs, you don’t get to pick the share price. It’s automatic, and sometimes you might end up investing when prices are higher.

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Is DRIP right for you?

DRIPs are an exciting way to automate your investing strategy, but like any ride, they come with their twists and turns. It’s essential to balance your long-term goals and short-term needs. So, hop on the DRIP coaster if you’re up for a long-term wealth creation adventure.

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Hunny Meghani

A curious mind, a love for writing, and a passion for all things finance - that's me in a nutshell. Whether I'm exploring the latest stock market trends or diving into the nitty-gritty of personal finance, marketing, and AI. I'm always on the hunt for the next big story.

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