Multiple choice

In the dividend reinvestment option the number of units held by an investor increases because of

  1. growth in net asset value i.e. capital appreciation

  2. reinvestment of dividend, which is like compounding

  3. interest received on the fund's assets

  4. None of the above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

In the dividend reinvestment option, the dividend declared by the mutual fund is automatically used to purchase additional units of the same scheme at the prevailing NAV. This creates a compounding effect as the investor receives more units, which in turn generate future dividends, leading to exponential growth in holdings over time.

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