InvestorQ : How can I calculate return on mutual funds under the reinvestment plan?
Dhwani Mehta made post

How can I calculate return on mutual funds under the reinvestment plan?

Neha Samdani answered.
3 years ago
Reinvestment plan means a plan under which all the dividend received on mutual funds is again used to buy additional units of mutual funds at prevailing NAV (Net Asset Value).

Let us understand this with an example,
A mutual fund having 300 units has a NAV of Rs.8.75 at the beginning and Rs.9.45 at the end of the year.

The mutual fund manager has two options:
Pay Rs.0.75 per unit as dividend and Rs.60 as Capital Gain, or – (General Plan)
Both the above distributions are to be reinvested at a NAV of Rs.8.65 p.u. (Reinvestment plan)
Under the general plan, the return is calculated according to the common formula:
HPR(%)= NAV at end- NAV at beg +Dividend + Capital Gain/NAV at beg
With the use of above formula return under a general plan is =23.43%
Now, to calculate return under reinvestment plan:
At first one has to calculate total distribution to be reinvested:
(.75+.60)*300 = Rs.405/-
Therefore, additional units to be received = 405/8.75 = 46.8208 units
Total units = 300+46.8208 = 346.8208 units
Now, to calculate holding period return use the general formula, just mention units, and NAV differently at the beginning and end.
HPR (%) = (NAV at end*No. of units at end) - (NAV at beg*No. of units at beg) + Dividend +Capital Gain/ (NAV at beg*No. of units at beg)
= (9.45*346.8208) – (8.75*300)+0+0 / (8.75*300) = 24.86%

Why dividends and capital gains are in the above answer?
The dividend and capital gain were due for the receipt but were not actually received by the investor since they were reinvested to buy additional units of mutual funds. Therefore increasing the no. of units held and decreasing or nullifying the effect of dividend and capital gain on the total investment.

Which plan is better?
It is better to invest in the reinvestment plan since the return is more on it as compared to a general investment plan.