Equity mutual funds can make money throughout the year, either in the form of capital appreciation when stocks within the fund are sold at a profit, or when stocks within the fund pay dividends. Under federal law, mutual funds must distribute capital gains and dividend income at least once during a calendar year, according to the Investor Guide. Three key dates, including the ex-dividend date, determine when and how distributions are made.
The process of distributing dividends and capital gains begins with the record date, which usually is set by the fund managers. Investors holding shares on the record date are called shareholders of record, and they're entitled to distributions as fund owners.
The next key date, the ex-dividend date, is determined by the record date. The ex-dividend date typically is the day after the record date, and on the ex-dividend date the distribution income to be paid out to shareholders is deducted from a fund’s total assets.
The payable date, which can be one to several days after the ex-dividend date, is the day when distributions are sent to shareholders who don't want to reinvest this money. Those who want to reinvest have shares automatically purchased for them on the payable date.
In 2009, a T. Rowe Price fund called the International Equity Index set a record date of Dec. 15. As a result, the following day, Dec. 16, became the ex-dividend date, and Dec. 17 became the payable date. Mutual fund managers sometimes declare their record dates at the beginning of each year, so you can determine early what the ex-dividend date will be; other companies set their record dates as dividend periods draw to a close.
Also, while mutual fund distributions are required at least once a year, many funds provide them multiple times during the year, either semiannually or quarterly. Therefore, your mutual fund may have more than one set of record, ex-dividend and payable dates each year.
If you're a shareholder on your mutual fund’s record date, you see the share price of your fund drop on the ex-dividend date as the managers set aside money to pay the distribution. So on the record date you might own 100 shares at $24 per share, for a total of $2,400. With a distribution of $1.50 per share, on the ex-dividend date your investment is worth $22.50 per share, not counting any market fluctuations.
With reinvestment you retain the same overall value, since you now have 100 shares at $22.50 and 100 shares at $1.50, which equals the same $2,400. But you now owe taxes on that $150 in distribution shares, unless they're held in a tax-deferred account.
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