Walter Bagehot once said, “The lesser money lying idle, the greater is the dividend.” And what better if this dividend can be further invested to make more money. Dividend Transfer Plan runs on this philosophy.
Dividend Transfer Plan (DTP) is a strategy where the dividend declared in one mutual fund scheme is transferred as an investment to another scheme of the same mutual fund house. This facility can be used from an equity scheme to an equity or debt scheme and also from a debt scheme to an equity or debt scheme.
Before we dive further into this, let us understand how Dividends work. When you invest in equity shares of a company, you are entitled to receive dividends the company declares. In a similar manner, mutual fund investments yield dividends as well. For instance, say you hold 1000 units of a mutual fund scheme and it declares a dividend of Rs.0.15 per unit, you will receive dividends worth Rs.150.
Let us break this down with an example
Say you have invested an amount of Rs.50000 in an equity mutual fund scheme (Scheme A) on January 01, 2017 at the Net Asset Value (NAV) of Rs.14.10. You would have received 3,546 units (Rs.50000 divided by Rs.14.10). At this stage you have three options: a. Reinvest the equity dividends into the same scheme b. Opt for dividend payout and get the money back in your savings account or c. transfer the dividends from this scheme to another equity or debt mutual fund scheme (Scheme B).
Let us take a look at how we can benefit by transferring dividends
| Date: Jan 01, 2017 ; Amount Invested: Rs.50000 ; Nav: Rs.14.10 ; Units = 3546 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Assuming dividend is transferred to Scheme B | ||||||||
| A | B | C | D = B*C | E = D | F | G = E/F | H | |
| Date of Dividend Declaration | NAV | units | Per unit dividend (Rs.) | Dividend amount (Rs.) | Amount invested | NAV | No. of units purchased | Balance units |
| Apr 01, 2017 | 14 | 3546 | 0.2 | 709.22 | 709.22 | 14.2 | 50 | 50 |
| Jul 01, 2017 | 14.4 | 3546 | 0.15 | 531.92 | 531.92 | 14.6 | 36 | 86 |
| Oct 01, 2017 | 15 | 3546 | 0.15 | 531.92 | 531.92 | 15.1 | 35 | 122 |
| Jan 01, 2018 | 15.3 | 3546 | 0.1 | 354.61 | 354.61 | 15.4 | 23 | 145 |
*For illustrative purposes only; the actual scheme NAV may vary
No. of units have been rounded off for convenience.
From the illustration we see that if dividend is transferred to another mutual fund scheme, the total capital would be Rs.56486.8 [Scheme A: Rs.54253.8 (3546*15.3) + Scheme B: Rs.2233 (145*15.4)]. Thus, DTP can help us in further growing our earnings.
One major reason why a Dividend Transfer Plan could be good for you is that when markets become expensive, DTP gives you the option to reduce exposure from equity and transfer to debt.
To undertake DTP, all you have to do is fill in basic information stating the name of the scheme you wish to move the dividend out from as well the one you wish to invest in. The rest will automate and you can then relax as the transfer process will diligently continue till the date specified by you.
Important Note: In case of any Dividend option, unlike share price of the Company, the Net Asset Value (NAV) of the scheme will fall to the extent of dividend payment and statutory levy, if any as dividend is paid from the NAV of the scheme.
Dividend declaration is subject to availability to distributable surplus and approval of trustees.