UNDERSTANDING MUTUAL FUND REINVESTMENT UNITS
Reinvestment Units (RIU):
Reinvestment is using dividends, interest and capital gains earned in an investment or mutual fund to purchase additional shares or units, rather than receiving the distributions in cash. In terms of mutual funds, it is the reinvestment of distributions and dividends to purchase additional units of that fund. Cash is automatically used by the fund’s administrators to buy more fund units on behalf of the investors and transfer them to individual investors’ accounts. Fund holders realize a capital gain upon the sale of their units in the fund.
Rules on Dividend Declaration of Mutual Funds of Bangladesh:
According to the Mutual Fund Rules in 2001, minimum 70% income of the Fund will be distributed as cash dividend or reinvestment or both cash dividend and reinvestment at the end of each accounting year. The Fund shall create a dividend equalization reserve fund to ensure consistency in dividend. The dividend will be distributed within 45 days from the date of declaration.
Calculation of RIU:
RIU Calculation – The Whole Process:
Since, distributed Reinvestment Units (RIU) opposed to cash dividend add new number of units to the existing one, the NAVPU goes down automatically. The fund managers ultimately take the challenge, through issuing RIU, to bring back NAVPU to keep the units market price in the exchanges. But the fund managers should keep in mind the opportunity costs of the unitholders while declaring RIU though it gives additional fund to grow further.
Disclaimer: This publication is produced by Research and Innovation Lab at Royal Capital Limited (RCL) solely for the information of Clients of RCL. Clients are expected to make their own investment decisions using any information contained herein. The contained information in the report should not be interpreted as an offer to sell, or a solicitation of any offer to buy any investment. Projections of potential risk is based on published information but does not guarantee of any actual risk or return to be materialized.