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 367

    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

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Copyright and Disclaimer
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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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