Mutual Fund Distributions- Payouts To Shareholders
People often get scared when they look online or they read an article in a newspaper and they see that the price of their fund, or the net asset value, NAV, took a steep drop. Most people just assume that the manager messed up and lost their money for them. However, the reason that the prices can take a deep drop is when the mutual funds pay out distributions. Distributions are payouts that are given to shareholders but they make the net asset value of the fund go down. They are a taxable issue. According to the law, the mutual funds are legally required to allocate and hand out to the shareholders at least 90% the gains and income that are earned from dividends every single year. The distributions can be given out at any time during the year, but most mutual funds choose to distribute their funds sometime in December at the end of the year.
There are three dates that shareholders should remember because they are important for the distribution of income and funds. The record date is when the managers or people in charge of the fund decide what day the distribution will be handed out. The X-date tells the date that the prices or the NAV of the mutual fund will go down because of the intended distribution. Lastly, the distribution date is as its name implies- that date that the actual distributions are made to the shareholders of the mutual fund.
Shareholders should be aware that despite their concerns, the distributions of earnings will not have an impact on the actual value of the person's share in the mutual fund. The value that the share had before the distribution will be the same after the distribution, despite the change in the net asset value.
Often, the distribution date is the same date as the X- date, which means that the distributions are handed out the shareholders on the same day that there is a change in the NAV. It is not recommended to people or potential investors to purchase a fund immediately before the distributions are to be dealt out because the new shareholder will be impacted for tax purposes, regardless of how long the fund has been held. This will result in unnecessary expenses for them. Another issue to keep in mind is that even if the mutual fund shares have lost money during a specific year, the shareholders may still find that they are required to pay a capital gains tax. Shareholders should be aware of all issues involving a mutual fund so that they aren't caught with any surprises.
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