normally distributed once or twice per year. As these stocks'
share prices are automatically adjusted down every time they
pay dividends, the funds' NAVs are adjusted automatically based
on the share prices of those stocks. If the fund also holds bonds
(in addition to stocks) in its portfolio, the coupon payments are
sometimes lumped in with these distributions rather than being
paid in frequent periods like many fixed-income funds. As an
example, the Vanguard Asset Allocation fund (VAAPX) makes
its income dividend distributions in June and December. While
a fund's NAV drops every time it makes an income dividend
distributions, it is usually by a small amount as these
distributions are usually a small percentage of the fund's NAV.
Many times such NAV reductions are barely noticeable.
- Capital Gains - Just like investors who realize capital gains by
selling their individual stocks or bonds at a profit, funds also
realize capital gains as they switch investments by selling their
securities and buying others throughout the year. These capital
gains are also distributed in the form of cash to the investors a
couple of times per year, and the fund's NAV is adjusted
accordingly. For example, the Fidelity Magellan fund (FMAGX)
makes its capital distributions in May and December, and
Vanguard Asset Allocation fund (VAAPX) makes its capital
gains distributions in December. Capital gains distributions
could actually have a significant impact on a fund's NAV,
depending on their amounts. In our example above, there is a
good chance that the fund made a $5 per share capital gains
distribution, causing its NAV to drop from $20 to $15.
Now you are probably wondering why a fund even goes through the
trouble of making distributions when they can simply use the proceeds
to make more investments. This would be easier on investors as well, as
the fund's NAV would remain intact, making it easier to track. But the …