An investor holds 2,000 units in a mutual fund scheme under the Reinvestment of Income Distribution cum Capital Withdrawal (IDCW) option. The scheme declares a dividend of Rs. 2.50 per unit when the cum-dividend NAV is Rs. 25.00. How many additional units are allotted upon reinvestment?

[ A ]200.00 units

[ B ]500.00 units

[ C ]222.22 units[ CORRECT ]

[ D ]180.00 units

Takeaway

Option C is correct: 222.22 units

Derivation

In an IDCW Reinvestment plan, the gross dividend is reinvested into the same scheme at the ex-dividend NAV. Gross dividend = 2,000 units * Rs. 2.50 = Rs. 5,000. Upon declaration, the NAV drops by the dividend payout to the ex-dividend NAV = Rs. 25.00 - Rs. 2.50 = Rs. 22.50. Additional units allotted = Gross dividend / Ex-dividend NAV = Rs. 5,000 / Rs. 22.50 = 222.22 units (ignoring statutory stamp duty). Total holding expands to 2,222.22 units. This tests the operational mechanics of dividend reinvestment. The primary mistake is dividing the dividend by the cum-dividend NAV (Rs. 5,000 / 25 = 200 units).

Why the others fail

A — 200.00 units

200.00 units erroneously divides the dividend by the cum-dividend NAV of Rs. 25.00 instead of the ex-dividend NAV of Rs. 22.50.

B — 500.00 units

500.00 units incorrectly divides the total dividend amount by an arbitrary factor of 10 rather than the ex-dividend NAV.

D — 180.00 units

180.00 units is an arithmetic error resulting from applying an arbitrary 20% discount to the reinvestment unit calculation.