3.1.3.4. Investing and Reinvesting in Mutual Funds
Automatic reinvestment. Investors may receive dividends and capital gains in the form of a check, or they may use the money to automatically reinvest in more shares. Automatic reinvestment occurs at the NAV and does not incur sales charges. This saves the investor money. Reinvested dividends, income, and capital gains are subject to taxation. Retirement plans typically reinvest automatically because there are considerable tax penalties for early withdrawals.
Dollar cost averaging. Dollar cost averaging is an investment strategy in which an investor makes regular, periodic purchases in the same dollar amount for the same security or securities. An investor who employs this strategy will end up purchasing more shares when the price of the security is low and fewer shares when the price is high. This strategy helps an investor avoid making a large investment when the price of a security is too high or selling a large amount wh