Series 6: 5.1.3.4. Investing And Reinvesting In Mutual Funds

5.1.3.4. Investing and Reinvesting in Mutual Funds

Automatic reinvestment. An investor may receive dividends and capital gains in the form of a check or may automatically reinvest in more shares. Automatic reinvestment occurs at the NAV and does not incur sales charges, saving the investor money. Reinvested dividends, income, and capital gains are subject to taxation, however. 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 of the same dollar amount in 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 high or selling a large amoun