Hypothetical Bond Fund Question

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Third Son
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Hypothetical Bond Fund Question

Post by Third Son » Tue Jan 14, 2020 10:40 am

Good Morning,

Say I want to invest in Fidelity's Total Bond index fund (FXNAX) and put $1M in the Fund in January. My "imaginary friend" Invests $1M in September.

Knowing that the fund prospectus states:

Dividends and Capital Gain Distributions

........The fund normally pays capital gain distributions in October and December.


Who would have more in the fund on December 31st?

retired@50
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Re: Hypothetical Bond Fund Question

Post by retired@50 » Tue Jan 14, 2020 11:15 am

Third Son wrote:
Tue Jan 14, 2020 10:40 am
Good Morning,

Say I want to invest in Fidelity's Total Bond index fund (FXNAX) and put $1M in the Fund in January. My "imaginary friend" Invests $1M in September.

Knowing that the fund prospectus states:

Dividends and Capital Gain Distributions

........The fund normally pays capital gain distributions in October and December.


Who would have more in the fund on December 31st?
I'm going to go out on a limb here and say the person who deposits in January will have more, because in addition to the capital gains already mentioned, the fund pays a monthly interest dividend. So, the first depositor will have 8 more of those payments. See distribution info on the link below. This of course assumes no drastic moves in interest rates in the interim.

Regards,

https://fundresearch.fidelity.com/mutua ... =sq-NavBar
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chevca
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Re: Hypothetical Bond Fund Question

Post by chevca » Tue Jan 14, 2020 11:22 am

Yes, you get monthly dividends. So, Mr. January likely wins.

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Stinky
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Re: Hypothetical Bond Fund Question

Post by Stinky » Tue Jan 14, 2020 4:14 pm

Mr January wins.

Unless the share price of the fund goes down more between January 1 and September 1 than the dividends paid between those two dates. (Such a share price change would likely happen because interest rates went up).
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firebirdparts
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Re: Hypothetical Bond Fund Question

Post by firebirdparts » Tue Jan 14, 2020 4:34 pm

The January guy would. That fund made a ton of money between January and September, and that money wasn't payable as dividends. It was in fact capital appreciation, but even that is not payable if the fund doesn't sell the bonds. The fund enjoyed capital appreciation of about 5%, and best I can tell they paid Zero out in capital gain distribution.
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Third Son
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Re: Hypothetical Bond Fund Question

Post by Third Son » Wed Jan 15, 2020 8:18 am

Thanks for the replies folks...kinda what I thought even though there is some ambiguity in my brain :confused

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jeffyscott
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Re: Hypothetical Bond Fund Question

Post by jeffyscott » Wed Jan 15, 2020 9:37 am

Isn't the timing of when the gain is actually paid out meaningless? If a bond pays a capital gain distribution, isn't the net effect no change in the total value of the investment, just like a stock fund?

For example, if the price is $51 and it pays a $1 cap gain, the price becomes $50. So instead of a share worth $51, you now have a share worth $50 and $1 (the $1 can be reinvested, buying an additional 0.02 shares @ $50).
Time is your friend; impulse is your enemy. - John C. Bogle

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firebirdparts
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Re: Hypothetical Bond Fund Question

Post by firebirdparts » Wed Jan 15, 2020 9:52 am

jeffyscott wrote:
Wed Jan 15, 2020 9:37 am
Isn't the timing of when the gain is actually paid out meaningless?
Yes, but look at the question he asked. I don't know why he asked it that way, but we were just trying to take it at face value. If somebody asks you how much was in the fund on a particular date, it matters a whole lot the date when money went out.
A fool and your money are soon partners

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