How to Use Automatic Reinvestment For Mutual Funds

Automatic reinvestment is a tool used by mutual funds that allows investors to purchase additional shares in the fund using their dividends or capital gains distributions. It's similar to an automatic deposit into your checking account. In this case, money comes in the form of dividends or capital gains distributions, which you receive when the mutual fund does well. Additionally, instead of sending you the earned money, your fund manager reinvests it into your mutual fund. This gives you more shares of your fund and helps avoid excess taxes.

Difficulty: Easy

Instructions

Things You'll Need:

• Your mutual fund prospectus

Learn to Use Automatic Reinvestment for Mutual Funds

1. Open your mutual fund prospectus and find the section about automatic reinvestment options.

2. Realize that your mutual fund may use automatic reinvestment unless you explicitly state otherwise. Read your prospectus to see which tactic your mutual fund uses.

3. Follow the instructions in your prospectus if you have to sign up to use automatic reinvestment. If you cannot find instructions, call your mutual fund manager and ask him what you need to do.

4. Discuss any tax liabilities or gains with your financial advisor or fund manager. Automatic reinvestment may carry additional benefits or tax losses if you are buying and selling other mutual funds at the same time as you are reinvesting.

Tips & Warnings

• Automatic reinvestment is an easy way to add shares to your investment, so it is particularly useful if you're planning to invest for a long time.
• Read the prospectus. Before investing in any mutual fund, read the prospectus to determine the fund's objectives, performance history and fees.
• Keep your tax advisor in the loop. Investing in mutual funds can have significant tax consequences. Make sure your tax planner knows about the investments you plan to make.
• Check for minimum investment amounts. Most funds have them.
• It's easy to forget about your fund with automatic reinvestment. Continue to read your quarterly or annual reports and any other information your fund sends you.
• If you are selling and buying other mutual funds at the same time as you're automatically reinvesting, you can get caught in a tax liability called a wash sale. A wash sale is when you sell shares at a loss and then buy nearly identical shares within 30 days, and it is not allowed to be counted as a loss.