Why does net asset value (NAV) drop when a distribution is paid?


Distributions reduce the fund’s NAV/units per share by the amount of the distribution because after the payout, the fund holds less assets. Said another way, the NAV is the value of the underlying assets so when a mutual fund pays out a distribution, it stands to reason that the NAV would drop by that same amount.

This table explains what we just said above but with numbers:

5% distribution for a fund with a $10 NAV/unit


If the distribution is paid in cash:

Pre-distribution value of investment

Distribution

1,500 units @ $10 = $15,000

1,500 units @ $0.50 = $750


If the distribution is reinvested:

Pre-distribution value of investment

Distribution

1,500 units @ $10 = $15,000

1,500 units @ $0.50 = $750

In both scenarios, the overall value of the investor’s portfolio is the same before and after the distribution (before accounting for taxes). One has mutual fund units worth $14,250 and cash of $750 for a total value of $15,000 while other has mutual fund units worth $15,000.

Comments

Popular Posts