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Mutual Fund Distributions

By Matthew Kovach, Investment Analyst

The rule of thumb in investing is to buy low and sell high. So it must be bad when the price of one of the positions in your portfolio goes down, right? Well, not necessarily.

More often than not mutual fund shareholders will receive capital gain distributions and dividends at the end of each year in late November or December. Distributions and dividends are the result of earned income within the fund throughout the year. When a fund sells one of its investment positions at a profit, the sale is held in the fund as a capital gain. Similarly, when the fund receives dividend payments from a portion of its holdings, the income is also held in the fund. Both the capital gains and dividends are a source of income for the fund and is reflected in the fund’s net asset value until it is paid out to shareholders in the form of a distribution. When the payout occurs, the mutual fund’s share price drops to reflect the decline in the fund’s net asset value as a result of holding less cash.

Similar to mutual funds, exchange traded fund (ETF) shareholders may receive dividend payments and the amount of the payment will be deducted from the share price on the day of the dividend. However, ETF dividend payments may be in the form of cash or additional shares. Typically, along with bond funds, these payments are on a more frequent schedule than mutual funds.

For example, a $100 per share fund that distributes $5 to all shareholders may drop by $5 on the day of their distribution. As a result, you would likely notice a 5% drop when reviewing their share price. However, you will receive that $5/share distribution back a day later in the form of cash or reinvested shares. So, while the fund might show a loss for the day, you might not have actually lost anything.

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. Additionally, 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.

If you would like more information or would like to learn more, please reach out to myself of your advisor and we would be happy to chat.

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.

CAR: 1122-02318


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