Why did my fund unexpectedly drop in value

? Posts asking the question, “The market was up but my fund (unexpectedly) is down” are quite frequent on the discussion board, particularly in the latter part of December. The usual answer to this question is that the fund’s value dropped because it paid a distribution.

Fund net asset values and fund distributions
Mutual funds and exchange-traded funds (ETFs) are essentially required to pay net income and net realized capital gains to their shareholders at least annually. While some do so monthly or quarterly, most do so annually, during the last half of December. Funds gain income from the securities the funds hold (dividends for funds holding stock, and interest income for funds holding bonds and money market instruments).

Also, funds may realize capital gains when they liquidate holdings. In order for the fund company to avoid having to pay taxes, the law requires that these dividends and capital gains be paid to shareholders so that taxes (if due) are then paid by the shareholders. In taxable accounts these distribution payments will be documented during January on a Form 1099-DIV.

If your stock or balanced fund is paying out a dividend and/or capital gains distribution, the net asset value (NAV) of the fund will drop by the per share amount of the distributions (most bond funds accrue interest with the result that dividend distributions do not reduce net asset value). Taxes aside, the investor's economic position is not changed by the distributions, regardless of whether the distributions are re-invested in the fund or taken in cash.

If your fund has a surprising drop in value, follow these guidelines to help figure out what happened:


 * Check your online statement. Be aware that the dividend may not be paid until a few days after it is declared.
 * Check the fund’s web site. For mutual funds, the ex-dividend date is typically the first business day after the record date. Dividend dates and estimated amounts are usually posted a few weeks in advance.
 * For Vanguard: Mark your calendar for year-end fund distributions (December 22, 2014)
 * For Fidelity: Fidelity Fund Distributions (December 2014)
 * Check your e-mail. Fund companies routinely send e-mails in advance of paying distributions. Fund holders routinely ignore these e-mails.
 * Check out the fund history at some place like Yahoo! Finance. Such sites show the date and amount of distributions paid. Data for past years (dates and amounts paid) may be quite useful for your planning.

If you are invested in a tax-advantaged account with dividends reinvested, none of this really matters, because the distributions are shielded from current taxation. You might question yourself as to why you are paying so much attention to daily price fluctuations.

In a taxable account, the distribution does matter since it is an involuntary taxable event. You probably should wait until after the distribution to purchase new holdings in the fund. And, if you're selling the fund in a taxable account, you would want to sell prior to the distribution in order to avoid paying taxes (at probably less favorable rates) on the distribution.

Why doesn't my economic position change?
If you are reinvesting dividends, and you check before and after the distribution, you will see that you now own a larger number of shares of the mutual fund. When the dividend is paid, the share price drops by the amount of the dividend--but as a result of reinvestment, you own more of those lower-valued shares, and it all balances out.

If you are not reinvesting dividends, then in your statement the total value of your fund falls--but as a result of the distribution, your money market settlement account now has a higher value because the dividends were paid into that account.

Of course, the intrinsic value the marketplace puts on each share continuously fluctuates day by day, so the numbers will not add up exactly.

Most published daily returns will adjust for the distribution, so that you won't see the drop. For example, if your fund reported a value of $30.00 on December 19, paid a $2.00 distribution, and reported a value of $28.28 on December 20, the reported daily change will be +0.28 and +1%. If you held the fund and reinvested the distribution, you did gain 1%, so this is the correct number for the fund performance.