It would be great if someone could clarify on the below issues (1) Cap Gains Distribution: Most Mutual Fund-distribute most of their realized capital gains at the end of year to avoid paying tax- Is this amount taken into account while calculating the returns of the Mutual Fund. I think that a 5 year returns for a Mutual Fund-would be calculated based on opening and closing NAV-thereby ignoring the distributions, thereby ingoring this. (2) Distribution on pro-rata basis: How is the Cap Gains Distribution done among the investors-is it based on amount of units held by each investor. So if an investor holds 100 units and there are 1000 units in the fund- would he get 10% of the total Cap Gains Distributions. If that is the case- why do investment websites, advise against buying Mutual Fund-before a Cap Gains Distribution is about to take place?
- Cap gains distributions reduce NAV. You’re correct 2) It’s done on a per share (pro-rata) basis. You just receive $x.xx of the cap gains distribution for every share you own. If you owned 10% of the outstanding shares you would receive 10% of the total cap gains distribution. A lot of investors, in taxable accounts, want to avoid paying the cap gains distribution. It’s just a pain in the @ss and we don’t like to create any additional tax paperwork for our clients in the form of a 1099. Unless a particular fund has a large cap gains distribution, >$1.00, we’ll sell the fund before the record date and buy a sector/index ETF. We saw this in 2008 when some natural resource funds had enormous L/T cap gains from some of their commodity positions. The year end cap gains distribution was like $4.00.
Yes what chuck said. In addition purchases of mutual funds in taxable accounts should be monitored near the end of the year until distribution estimates are released. The purchases can be timed to avoid these distributions
John09 Wrote: ------------------------------------------------------- > I think that a 5 > year returns for a Mutual Fund-would be calculated > based on opening and closing NAV-thereby ignoring > the distributions, thereby ingoring this. You cannot ignore distributions in calculating total return. If you simply use opening and closing NAV to calculate total return, your return will be understated.
In taxable account, not only advisor should consider/advise client on the distrubution date of the MF, in most cases, selling cap/dividend distribution of the MF is considered an unethical practice.