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It's December, What Happened to My Mutual Fund?!?!


Two things in life are certain, as the saying goes, “Death and Taxes.” Perhaps a third certainty is Government Regulation, and especially so in our financial advising business. The Securities and Exchange Commission (SEC) regulates investment markets and those practitioners involved in the markets. Naturally, the gigantic mutual fund industry has rules galore, and they must be followed by all fund families.

While this is primarily a discussion of taxes and misunderstandings, regulation is the underlying cause of the confusion many people have about mutual fund performance. Many investors have questioned why their long-held and successful mutual funds seemingly under-performed the markets late in 2017. There is a reason people feel this way. Here’s why, and it is solidly based on the SEC rules for all mutual funds:

  • The value of a share in a mutual fund is called the “Net Asset Value,” or NAV
  • The NAV is the sum of all fund assets, including the value of the stocks and/or bonds owned by the fund, plus the cash available after paying fund expenses, divided by the number of fund shares outstanding
  • During any one operational year, the fund receives income in the form of interest, dividends, and/or capital gains/losses from sales of fund assets
  • By SEC Rules, the income and capital gains accumulated during each year are required to be distributed to the shareholders prior to year-end (done on the “Distribution Date”)

Investors usually track the value of a stock by its price on any day, or for that matter, any minute of any day. It is a natural thing to do, although it can result in uneasiness in times of volatility. Following a mutual fund’s progress by monitoring the price of a share is fine most all the time. But during the season of annual (or more frequently for some funds) distributions, there is a potential for misunderstanding.

In a great market year, such as 2017, these distributions can be quite large, and the apparent change in fund value can be startling. This is why the number of questions over the last month has escalated, and it comes as no surprise. Here’s why, in the simplest terms I can present:

  • On the Distribution Date, all earnings and capital gains for the period are calculated and distributed by the fund to its shareholders pro-rata by shares owned
  • The value of the distribution per share is subtracted that day from the closing price
  • The distribution dollars can be sent to shareholders, or they can be reinvested in new shares – the choice is up to the owner
  • Whichever method is used, the distribution value is subtracted from the share price at the moment the distribution is made

Resulting from the distribution are a lower priced share and a cash payment to the shareholder. But the process is not immediate. It may take a day or two to post to the accounts. When it takes place on a Friday, it may take longer, due to the intervening weekend. That’s when some fund shareowners tend to panic.

The second way investors get upset is when they don’t notice the distribution, but days later they look at a price chart, and one day there is a sharp fall in share price. It makes for an ugly chart, and no one could blame them for their distress. But the reason is the same, and all mutual fund owners should understand the process. We are here to help.

In every case, after a day or two, when the accounting is completed and accounts are updated, the true account value is visible in the shareholders’ accounts. They can then breathe a sigh of relief.

The evolution of the mutual fund industry, the financial planning industry, and the knowledge of individual investors has been geometric. It has resulted in rewards for the average person, far beyond what our parents would have been able to imagine. All we need in order to participate is knowledge, education, goals, and propensity to save. Put the emphasis on knowledge, and you can’t go wrong in the long run.

Van Wie Financial is fee-only. For a reason.