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If mutual funds distribute all of their capital gains and dividends, why does the NAV increase over time?
If mutual funds use most of the capital gains and dividends of their portfolios to make distributions to investors, why does the fund's net asset value (NAV) increase over time? It seems that distributing these gains would cause the NAV to remain steady, or to decrease.
2 Answers
- ThorLv 71 decade agoFavorite Answer
From unrealized capital gains. They only have to distribute the gains that are realized.
This is one reason with mutual funds you might want to pay attention to the turnover rate. The more a fund buys and sells, even to the point of being called "churning" that generates more fees for the company, not you, will affect how much in capital gains they distribute.
That is one aspect people are seeing now. Most funds have large losses this year but because of the trading they have also realized capital gains along the way. So you end up paying taxes on distributed gains even though overall you have losses in the fund.
- jeff410Lv 71 decade ago
Capital gains distributions come from the profits of securities (stocks and bonds) they have sold. They reinvest the principal and obtain more money to invest. And many fund shareholders reinvest their capital gains and dividends. So they are continually investing in securities and those securities change value. Just as if you sold a stock for a profit and only took the profit out and reinvested the principal and maybe added more money to buy other stocks. The value of your portfolio is going to change.