Bond fund distribution, NAV reduction

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S_Track
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Bond fund distribution, NAV reduction

Post by S_Track » Mon Jun 10, 2019 9:01 pm

I understand that when a equity fund pays a dividend, the NAV is reduced accordingly. Does the same reduction in the NAV happen with a bond fund? I was reading the following from the wiki and if I understand it correctly the answer is no?

"When the fund distributes the income dividends at the end of the month, the net asset value does not change as both the assets and liabilities decrease by exactly the same amount."

https://www.bogleheads.org/wiki/Net_asset_value

venkman
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Re: Bond fund distribution, NAV reduction

Post by venkman » Mon Jun 10, 2019 9:26 pm

S_Track wrote:
Mon Jun 10, 2019 9:01 pm
I understand that when a equity fund pays a dividend, the NAV is reduced accordingly. Does the same reduction in the NAV happen with a bond fund? I was reading the following from the wiki and if I understand it correctly the answer is no?
It depends on the fund. Some accrue dividends daily and pay them monthly (so you'll get dividends based on the amount of time you were invested during the month) without affecting the NAV. Other funds, the NAV drops when dividend distributions are made.

Topic Author
S_Track
Posts: 243
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Re: Bond fund distribution, NAV reduction

Post by S_Track » Mon Jun 10, 2019 9:34 pm

venkman wrote:
Mon Jun 10, 2019 9:26 pm
S_Track wrote:
Mon Jun 10, 2019 9:01 pm
I understand that when a equity fund pays a dividend, the NAV is reduced accordingly. Does the same reduction in the NAV happen with a bond fund? I was reading the following from the wiki and if I understand it correctly the answer is no?
It depends on the fund. Some accrue dividends daily and pay them monthly (so you'll get dividends based on the amount of time you were invested during the month) without affecting the NAV. Other funds, the NAV drops when dividend distributions are made.
So in the case where the NAV drops, does it increase slight each day before the dividends are distrubted?

sport
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Location: Cleveland, OH

Re: Bond fund distribution, NAV reduction

Post by sport » Mon Jun 10, 2019 9:45 pm

S_Track wrote:
Mon Jun 10, 2019 9:34 pm
venkman wrote:
Mon Jun 10, 2019 9:26 pm
S_Track wrote:
Mon Jun 10, 2019 9:01 pm
I understand that when a equity fund pays a dividend, the NAV is reduced accordingly. Does the same reduction in the NAV happen with a bond fund? I was reading the following from the wiki and if I understand it correctly the answer is no?
It depends on the fund. Some accrue dividends daily and pay them monthly (so you'll get dividends based on the amount of time you were invested during the month) without affecting the NAV. Other funds, the NAV drops when dividend distributions are made.
So in the case where the NAV drops, does it increase slight each day before the dividends are distrubted?
Yes, but the daily amount is small and is masked by the changes in the bond market as interest rates fluctuate.

Topic Author
S_Track
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Re: Bond fund distribution, NAV reduction

Post by S_Track » Mon Jun 10, 2019 10:22 pm

Ok so that means Equity and Bond fund work some what the same with distributions in terms of the NAV. So why do I read the phrase "Bonds are for income"? Is it just because the majority of the total return of a bond fund comes from distributions where a Stock fund comes from capital?

dbr
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Re: Bond fund distribution, NAV reduction

Post by dbr » Tue Jun 11, 2019 9:49 am

S_Track wrote:
Mon Jun 10, 2019 10:22 pm
Ok so that means Equity and Bond fund work some what the same with distributions in terms of the NAV. So why do I read the phrase "Bonds are for income"? Is it just because the majority of the total return of a bond fund comes from distributions where a Stock fund comes from capital?
You are correct in your characterization, but when you read an expression like that you are reading something that wants to instruct people about investing by mouthing slogans rather than by laying out facts and analysis in a logical manner. Consequently what you are reading is garbage if it goes no further than that. That does not mean that a person might not invest only in bonds or in bonds up to their income needs as one, but not necessarily the best, of many possible ways to invest and also withdraw income from investments.

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Phineas J. Whoopee
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Re: Bond fund distribution, NAV reduction

Post by Phineas J. Whoopee » Tue Jun 11, 2019 12:31 pm

venkman wrote:
Mon Jun 10, 2019 9:26 pm
S_Track wrote:
Mon Jun 10, 2019 9:01 pm
I understand that when a equity fund pays a dividend, the NAV is reduced accordingly. Does the same reduction in the NAV happen with a bond fund? I was reading the following from the wiki and if I understand it correctly the answer is no?
It depends on the fund. Some accrue dividends daily and pay them monthly (so you'll get dividends based on the amount of time you were invested during the month) without affecting the NAV. Other funds, the NAV drops when dividend distributions are made.
And if I may add, most but not all US domestic bond funds declare dividends daily and pay them at intervals. Some, very much the minority, include accumulated coupons in the net asset value, which does indeed fall upon payment of a distribution, although of course the NAV also depends on other market changes which happened that day.

PJW

Topic Author
S_Track
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Re: Bond fund distribution, NAV reduction

Post by S_Track » Tue Jun 11, 2019 1:45 pm

dbr wrote:
Tue Jun 11, 2019 9:49 am
S_Track wrote:
Mon Jun 10, 2019 10:22 pm
Ok so that means Equity and Bond fund work some what the same with distributions in terms of the NAV. So why do I read the phrase "Bonds are for income"? Is it just because the majority of the total return of a bond fund comes from distributions where a Stock fund comes from capital?
You are correct in your characterization, but when you read an expression like that you are reading something that wants to instruct people about investing by mouthing slogans rather than by laying out facts and analysis in a logical manner. Consequently what you are reading is garbage if it goes no further than that. That does not mean that a person might not invest only in bonds or in bonds up to their income needs as one, but not necessarily the best, of many possible ways to invest and also withdraw income from investments.
Good point, thanks

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