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Mutual Fund Distributions

From time to time the price of your mutual fund will fall. This is absolutely normal especially in cases when the letter "x", "z", or "e" stand behind the NAV's value. Do not be surprised or alarmed. This decrease is caused by the execution of distributions by the mutual fund and does not mean that you have lost any money. Nevertheless, many investors are confused by such events since the NAV is decreased and especially because distributions cause taxable events.

Distribution Reasons

90% of the realized capital gains and dividend income represents the minimum amount that every mutual fund is required by law to distribute among its investors each year. Usually this is done in the late December, but other times are also possible.

Important Information to Remember

  1. Pay special attention to the following very important dates concerning mutual fund distributions.

     

    • Record Date

      At this date the mutual fund managers take the decision on the specific shareholders that are to be paid distributions. 

    • X-Date

      At this date the decrease in the Net Asset Value (NAV) is specified, which is harmonized with the distribution amount to be paid.

    • Distribution Date

      At this day the actual distribution among the investors is made.

    Sometimes the distribution date and X-date are one and the same date. This is a common practice by many mutual funds, which execute the decrease of the NAV and pay the distributions on one and the same day. This type of practice on the part of many mutual funds has some taxable implications. For instance they may affect both long-term and short-term gains but in a positive way taxable accounts. Still, these impacts are not observed in 401 (k) plans, IRAs, Roth IRAs and other non-taxable accounts.

  2. Avoid buying a fund when it is about to make distributions.

    No matter for how long you have been the owner of the fund's shares, the distributions that are about to be made will not pass you by. This may have a negative impact on your portfolio since it will represent a taxable event. 

  3. Capital gains taxes

    This type of taxes is paid even though the year has ended in a loss.

Distribution Effect on Your Account

Generally distributions do not affect the money in your account in no way. As a result of the paid distributions the Net Asset Value drops leading to no negative effect on your portfolio.

To better grasp the essence of distributions, consider the following example.

You are holding $20 000 in shares with Fund X. We will assume that during the period under consideration the stock holding remain the same. On the record date, the price of one share of Fund X is $6. Let's take December 10th as the X-Date. In this day the mutual funds NAV decreased to $5.95. This $0.05 per share drop is done in order to reflect the distribution that the fund is about to make to its investors that are owners of the fund on the record date. Meanwhile, Fund X's stock holdings have retained the same value. On the next day, which is actually the Distribution Date, the mutual fund distributes the allocated $0.05 per share. Finally, you are not hurt at all by the whole process and your initial $20 000 remain in your account. It is up to you to decide whether you want to reinvest it with the mutual fund or not. Have in mind that this example ignores regular changes to the NAV from stock or bond movements that it possesses for the purpose of simplicity.

Distributions are a peculiarity of mutual funds that you should become very well acquainted with since they represent an indispensable part of every fund's activities.

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