Most VCT funds offer automatic reinvestment of dividends (DRIS). But I can’t see why anyone would do this, but maybe my thinking is flawed.

While you can claim 30% of the cash reinvested via a tax rebate, and you are of course buying the right to future dividends, these benefits seem tiny compared to taking the tax free dividend itself. Why?….

Firstly VCTs don’t really offer long term growth, so the benefit of compounding isn’t there. Instead they rely on exiting their investments between 5-7 years to generate a profit to fund dividend payouts. Some of these will be flops of course, so VCTs are only likely to offer average returns. Secondly you reinvest in an illiquid market that trades at a discount to NAV, so your reinvestment is poor value eating into the already small value of reinvested dividend.

I am an investor in new issues of VCTs but take the tax free cash dividend. Have in got it all wrong?