Strike while the mutual fund distribution is hot!

Distribution:



The dividends and interest earned by a mutual fund on its investment is the fund’s dividend (income). Balanced and Equity Income mutual funds usually distribute dividends to shareholders quarterly, i.e. March, June, September and December. When a fund sells an investment security for a higher price than originally paid, the fund has a capital gain. A capital loss is realized when the fund sells an investment security for a lower price than originally paid. If the investment security is held by the fund for more than one year, the gain or loss will be a long-term capital gain or loss. When the investment security is held by the fund for less than one year, the gain or loss will be a short-term capital gain or loss. Mutual fund gains and losses are netted together and when the fund has a net capital gain, that gain is usually distributed to the share holder once a year (November or December).



By law, mutual funds must pay out income and realized capital gains to shareholders. These distributions are taken from the fund’s assets which is why the net asset value is reduced by the same amount as the distribution. Example: Mutual fund declares a distribution value of $0.15 will be given all on record shareholders November 15. The net asset value on market close of November 15 will be reduced by $0.15 plus or minus that day’s performance.



Mutual fund distributions give the shareholder one of two options. Share holders can either purchase more shares to increase the number of shares owned by reinvestment or they can receive full payment in the amount of the shares owned distribution value.



Net Asset Value/Share Price:



The net asset value (NAV) of a mutual fund is the same as the share price because mutual funds do not trade on the open market. The mutual fund company determines a mutual fund’s share price by dividing the total current market value of all the cash and securities in the fund’s portfolio, minus any liabilities, by the number of outstanding shares. In addition, the mutual fund’s share price is further reduced by the amount of distribution to shareholders.



The daily net asset value changes are known as the performance of the mutual fund. The percentage of performance is a gain or loss when the fund’s net asset value is more of less than the value of the share price. The return of a mutual fund includes the distribution and the performance. An NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio’s securities.



Here is a "hypothetical" Dividend Distribution/Reinvestment model:



Type of Investment: Equity Income mutual fund

Initial Purchase: $2,500 1/4/2010

Net Asset Value/Share Price): $20.00

Maximum sales fees: 5.00%

Investment Value: $2,375.00 (-5.00%)

Shares purchased: 118.75

Risk: High



1. 3/31/2010 Distribution of income $0.10 per share

Net Asset Value: $21.00

Total value of distribution: $11.875

Additional shares gained/reinvested: 0.5654

Total shares owned: 119.3154

Total Performance: $21.00 - $20.00 divided $20.00 = 5.0%

Total Return: $21.00 + $0.10 - $20.00 divided $20.00 = 5.5%

Yield on Investment: $21.00 x 119.3154 = $2,505.62 0.22%



2. 6/28/2010 Distribution of income $0.09 per share

Net Asset Value: $20.75

Total value of distribution: $10.738

Additional shares gained and reinvested: 0.5174

Total shares owned: 119.8328

Total Performance: $20.75 - $20.00/$20.00 = 3.75%

Total Return: $20.75 + $.19 -$20.00/$20.00 = 4.70%

Yield on Investment: $20.75 x 119.8328 = $2,486.53 -0.56%



3. 9/30/2010 Distribution of income $0.10 per share

Net Asset Value: $22.00

Total value of distribution $11.983

Additional shares gained and reinvested: 0.5446

Total shares owned: 120.3774

Total Performance: $22.00 - $20.00/$20.00 = 10.0%

Total Return: $22.00 + $0.29 - $20.00/$20.00 = 11.45%

Yield on Investment: $22.00 x 120.3774 = $2,648.30 5.93%



4. 12/31/2010 Distribution of income $2.00 per share

Net Asset Value: $21.50

Total value of distribution $240.75

Additional shares gained and reinvested: 11.1978

Total shares owned: 131.5752

Total Performance: $21.50 - $20.00/$20.00 = 7.50%

Total Return: $21.50 + $2.29 - $20.00/$20.00 = 18.95%

Yield on Investment: $21.50 x 131.5752 = $2,828.87 13.15%



Using this scenario (12/31/2010 $2.00 distribution), is when an investor should strike while the mutual fund distribution is hot! The reason is that the share price is $2.00 lower than the previous opening market day value. Assuming the previous market close net asset value was $23.50 and the opening purchase asking price would be $21.50 -8.51%.



Where can these type of mutual funds be found? The internet search for: "mutual funds that distribute income and/or capital gains" would provide the answer sought.



Mutual fund performance cannot guarantee future results. Always contact the mutual fund and read the prospectus before you make an investment.