Mutual Fund Distributions - How They Work

Written by Ryan Hitchcock (Financial Advisor, High Point Capital Group, Milwaukee, WI)

I thought this would be a good time to review how distributions from a mutual fund work, and then walk through a real example of a holding you own. 

I predominantly use ETF’s in portfolios, but sometimes a mutual fund is warranted for a certain allocations.   I like to do this since  there’s a chance you could be looking at a specific holding  that may look like a big loss…but in reality it’s not what it seems and even could be a gain.

How can this be, that seems crazy???  Let’s walk through it… 

In general, mutual funds have “pass through status” where the taxes are paid only by the investors in the mutual fund, not by the fund itself.  Mutual funds have a management team that buy or sell the holdings inside their particular fund.  Therefore, when they sell a holding, that transaction can create a distribution  paid out to the investors of that fund. When that distribution is paid to investors, the price of the fund is reduced by the amount of that distribution. 

You may be wondering why the price is reduced.  Think of it this way; if you personally have a net worth $100, but  give $25 to a friend, your net worth is now $75.   The Same is true for a mutual fund value.

Finally, those funds are used to buy additional shares at the reduced price of the fund. 

Confused yet??  Let’s take a specific fund for example… 

Invesco Convertible Securities Fund (CNSDX),for example, paid out a distribution of $7.1182 per share on 12/14/2021 (see attached PDF)

Price of fund on 12/13/21  -  $32.72

Price of fund on 12/14/21 -  $25.33

This chart looks really scary if you don’t know what’s happening!  

This is the reflection of the share price being reduced by the distribution (in this case the distribution was $7.1182/share).Intra-day market fluctuations affect the actual price by the end of the day (in this case the price actually went up a bit on 12/14/21 which is why the difference was $7.39 not $7.1182)      

Here is a Real world example

Hypothetically, if you owned 100 share of CNSDX on 12/13/21 = $3,272 total value of holding (12/13/21 at a price of $32.72). On 12/14/21 you received a distribution of $7.1182 per share =  $711.82 total distribution  ($7.1182 x 100 shares) .

At the end of the day you  purchased an additional 28.102 shares (12/14/21 end of day share price of $25.33 ÷ $711.82 your total distribution). On 12/14/21 you owned 128.102 shares (~28% more shares) at a price of $25.33 per share  = $3,244.82 .

Back to the question at hand… why might one of your mutual fund holdings show a loss on your online portal?

Take Wealthscape client-portal for example. This software  will show a position’s average cost of purchases.  It doesn’t differentiate from “your” actual initial capital purchase vs. a “distribution” purchase.  It's all added in the same way and spits out an average cost of shares purchased. 

In our earlier example, you may have purchased CNSDX earlier in  2021 with “your” initial capital purchase when the price was in the ~$30’s. Now, the recent distribution bought more shares at $25.33 per share.  Wealthscape would spit out an average cost per share, most likely higher than the recent price of $25.33 per share. This  in turn could end up showing as a loss on Wealthscape.  However, that overall position could be sitting at a gain from the standpoint of “your” initial purchase

If you should have any questions on your personal situation please don’t hesitate to reach out.