Dividend yield = Dividend per unit \/ NAV on the day of dividend payout<\/strong><\/p>\nWe take the above example where you too want to invest entire 1 Lac in Birla Sunlife Tax Relief 96 before 16th March 2007. First we calculate the dividend yield.<\/p>\n
Dividend Yield = 50\/134.27 = 37%<\/p>\n
Amount you need to invest to save tax on 1 Lac = 100000\/(1+37%) = Rs. 72,993<\/p>\n
You should mark up this investment by 1-2% to adjust for any NAV movements.<\/p>\n
But as in the last approach of Dividend payout I could have myself bought units from the money received from dividend, why do I need to opt for reinvestment?<\/p>\n
You are right. You can very well buy new units from the dividend payout money. But then you see the dates it\u2019s already mid March and you don\u2019t know till when dividend would be credited to your account and how much time you would take to buy new ELSS units. It may very well happen that you miss the deadline of 31st March.<\/p>\n
Are there anymore benefits of this new approach?<\/p>\n
I think one of the biggest benefits is that your investment like in case of growth option would create long-term wealth for you without any erosion in between due to dividend payouts. The second is the dividend declared in subsequent years would also automatically buy ELSS for you which would help you in reaching you goal of Rs. 1 lac Tax Saving investment without you even thinking about it. So it helps in further tax saving in subsequent years also.<\/strong><\/p>\nAnd whats\u2019 the catch?<\/p>\n
First you need a higher starting amount<\/strong>. To save tax on Rs 1 lac – In dividend payout case you required initially Rs 63,000 while in this case you require Rs 73,000. The second disadvantage is liquidity<\/strong>. Payout option would give you regular dividends while in reinvestment your entire dividend is reinvested. And the third and biggest issue of dividend reinvestment is there is good chance that a portion of your investment would get locked in forever.<\/strong><\/p>\nHow?<\/strong><\/p>\nHistorical records show that every ELSS fund declares a dividend at least once during any given three-year period. In a dividend reinvestment plan, the dividend gets reinvested into the fund. Any such reinvestment is considered fresh investment and gets locked in for three more years. Subsequent dividends declared on this reinvested amount get reinvested again for yet another three years. This way, you get into a vicious cycle of perpetual investment.<\/strong><\/p>\nThe way out<\/strong><\/p>\nMost fund houses allow you to switch from a dividend reinvestment option to a dividend option. For this, you need to write a letter, requesting for a change and\/or fill up a \u201cchange in option\u201d slip at the bottom of your account statement. A switch to dividend option is easy. A switch to the growth option is also possible with some fund houses. However, your fund may impose a lock-in from the time you switch your units to the growth option.<\/p>\n","protected":false},"excerpt":{"rendered":"
The \u201cInvestments for Tax Saving\u201d Season is on and this post is in continuation with the previous few posts on ELSS (Tax Saving Funds). In one of the post I had said that you should either go for Growth or Dividend Payout Option but never with Dividend reinvestment option while investing in an ELSS. But […]<\/p>\n","protected":false},"author":1,"featured_media":4541,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_uag_custom_page_level_css":"","site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"footnotes":""},"categories":[64,4,63,6],"tags":[401,635,634,83,970,463,464,465,526,65,36,632,527],"uagb_featured_image_src":{"full":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2010\/01\/Tax-Saving-Mutual-Fund-ELSS-Dividend-Reinvestment.png",1169,648,false],"thumbnail":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2010\/01\/Tax-Saving-Mutual-Fund-ELSS-Dividend-Reinvestment-150x150.png",150,150,true],"medium":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2010\/01\/Tax-Saving-Mutual-Fund-ELSS-Dividend-Reinvestment-300x166.png",300,166,true],"medium_large":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2010\/01\/Tax-Saving-Mutual-Fund-ELSS-Dividend-Reinvestment.png",768,426,false],"large":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2010\/01\/Tax-Saving-Mutual-Fund-ELSS-Dividend-Reinvestment-1024x567.png",1024,567,true],"1536x1536":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2010\/01\/Tax-Saving-Mutual-Fund-ELSS-Dividend-Reinvestment.png",1169,648,false],"2048x2048":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2010\/01\/Tax-Saving-Mutual-Fund-ELSS-Dividend-Reinvestment.png",1169,648,false],"yarpp-thumbnail":["https:\/\/www.apnaplan.com\/wp-content\/uploads\/2010\/01\/Tax-Saving-Mutual-Fund-ELSS-Dividend-Reinvestment.png",120,67,false]},"uagb_author_info":{"display_name":"Amit","author_link":"https:\/\/www.apnaplan.com\/author\/admin\/"},"uagb_comment_info":0,"uagb_excerpt":"The \u201cInvestments for Tax Saving\u201d Season is on and this post is in continuation with the previous few posts on ELSS (Tax Saving Funds). In one of the post I had said that you should either go for Growth or Dividend Payout Option but never with Dividend reinvestment option while investing in an ELSS. But…","_links":{"self":[{"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/posts\/302"}],"collection":[{"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/comments?post=302"}],"version-history":[{"count":0,"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/posts\/302\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/media\/4541"}],"wp:attachment":[{"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/media?parent=302"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/categories?post=302"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.apnaplan.com\/wp-json\/wp\/v2\/tags?post=302"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}