Updated: Jun 16
By Michael Mooney, CFP, MBA, Financial Advisor
As we approach the end of the year, you may notice some oddities within your portfolio. Specifically, it is not uncommon to see one of your Mutual Fund holdings have a very different return than the rest of the positions in your account (for the wrong reasons!). You may notice that one of your funds is down 5% or even 10% in one day. Is this a reason to be alarmed?
The short answer is, potentially not. Mutual Funds are required to distribute the income earned within their fund to shareholders at least once per year (for some funds, this may occur more often). Almost all Mutual Funds should pay these distributions out annually in late November or December. This income is derived from the income made by the fund off of the underlying positions within the fund. For example, if a mutual fund owns a stock within its fund and sells it for a profit during the year, that profit must get distributed to its shareholders as a Capital Gain Distribution. Similarly, if that stock issued a dividend during the year, it would likely end up getting paid out to the mutual fund shareholders at the end of the year.
On the day that the distribution is paid, the fund may drop in price by an amount equal to the value of the distribution. For example, a $20 per share fund that distributes $1 to all shareholders may drop by $1 on the day of their distribution. As a result, you would likely notice a 5% drop when reviewing their share price. However, you will likely receive that $1/share distribution back a day later in the form of cash or reinvested shares. So, while the fund might show a [massive] loss for the day, you might not have actually lost anything.
The distribution that you receive from the fund is taxable income if held in a brokerage (or non-retirement) account. As a result, we are conscious about making purchases close to the distribution date in brokerage accounts. It might not be prudent buy a fund a week before the scheduled distribution, only to have the fund distribute 10% out and cause a taxable event for the shareholder.
Some mutual funds will pay income on a monthly, quarterly, or semi-annual basis. This is much more common among bond funds than it is among equity/stock funds.
The amounts of the distributions vary from fund to fund and year to year. A fund that had a very successful year will likely have a higher distribution than a fund that did not. Please reach out to your advisor if you would like more information or if you would like to learn more.
Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges and expenses carefully before investing. The prospectus, and, if available, the summary prospectus, which contains this and other information, can be obtained by calling your financial advisor. Read the prospectus and, if available, the summary prospectus carefully before you invest.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. Past performance is no guarantee of future results.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Ascend Advisory Group is a separate entity from WFAFN.