Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 366

about, but not unexpected if the financial market went south and took your fund for a ride.

Distribution - Of all the reasons behind why your fund's NAV took a dive, this is the one that would throw a monkey wrench in your tracking. The fund could have distributed $5 per share to its investors and therefore it's NAV dropped from $20 to $15.

Fund distributions come mainly in the form of cash, not unlike cash dividends paid to stockholders by public companies, which are then followed by an adjustment to their share prices. That is why distributions are sometimes referred to as dividends as well. When a fund makes a distribution, it simply pays its investors a certain amount of cash per each share, but after making the distribution its NAV price is adjusted accordingly to account for the payout. You didn't think that your fund just pulled $5 a share out of thin air and gave it to you? Just about all funds make distributions which they carry out on certain pre-announced days. In order to understand why funds make distributions, let's look at the two types of fund distributions.

  • Income Dividends - This type of distribution is generated through interest (coupon) payments received on bonds and/or cash dividends paid by the dividend-paying stocks in a fund's portfolio. Funds that are strictly invested in bonds (fixed income funds) usually make their income distributions right after the coupon payments are collected. Therefore many fixed income funds, true to their names, make periodic distributions based on the periodic interest payments on the bonds in their portfolios. Their NAVs are then adjusted accordingly. As an example, the Fidelity Intermediate Government Income Fund (FSTGX) makes income dividend distributions every month of the year. Cash dividends collected on dividend-paying stocks are

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    Table of Contents Copyright and Disclaimer Foreword Money
    Bonds Futures Stocks Options
    Mutual Funds Retirement Final Words Appendix A

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