Mutual Fund Mysteries

[livingdeb]

Today I got a quarterly statement from the mutual fund I am using for my IRA. And I realized I don't really understand what all the different things mean.

I can see the part that shows my buying more shares each month. It shows that I paid $333.33, the share price that day, the resulting number of shares I bought, and my new share total. This part makes perfect sense.

And at the end of the year, they show the dividends, which I requested to be reinvested, and they show the share price on the day they reinvest dividends, and the resulting increase in my number of shares. I know that plenty of stocks pay dividends quarterly, so dividends should be showing up on every quarterly report. I assume that their using this money until their annual dividend reinvestment day helps them make additional money that they don't have to take as expenses.

Since mine is a small- and mid-cap fund, there aren't many dividends, so I don't worry about that too much.

Then there are various expenses. I have a no-load fund, so I assume that all these are included in the expense ratio calculation.

The weird thing is that I don't see any evidence of these expenses being subtracted. The statement shows what the expenses were. My best guess is that on the day they charge these fees, the share price is reduced. (The share price will also vary due to changes in the values of the stocks held by the mutual fund.)

Sometimes my statement shows short-term capital gains and long-term capital gains, and these are shown as a percentage, as a dollar amount, and as a number of shares transacted. I don't get that. When the stocks held by the mutual fund change in value, doesn't that just change the share price? These short-term and long-term gains probably apply only to the stocks they have sold, right? And so they have to report that so we know what to pay taxes on (if this wasn't in a nontaxable account). But then they add that to the total number of shares I own? I don't understand why this is a number that gets added on.

I don't really worry about any of this because after all the rigmarole, I get good returns. But it's disconcerting because I would think that mutual fund statements would be just the sort of thing I would understand.

Comments

[kevin-hogan.livejournal.com]

You're right that the long and short-term gains refer to securities the fund has sold in the past year. You'll also notice that on the date the dividends and gains are passed on to the owners of fund shares, the share price can drop precipitously - that's because money that used to be owned by the fund (and reflected in share price) is no longer owned by the fund but has been delivered as cash proceeds to the owners of the shares. However, if you've elected to have these cash proceeds re-invested as shares, then a few days later they take the cash due to you and convert them into shares. End result - you have roughly the same amount in dollars invested as you did before the distributions were granted, but more (and slightly cheaper) shares of mutual fund.

Notice that they don't pass on any long and short term capital losses to you, though, which means you can't deduct that money from your taxes...

[livingdeb.livejournal.com]

Thanks, that makes sense. As much as these things do, anyway.

I wonder how much the price of shares generally changes during that couple of days. Since on the average, stock prices go up, then on average they probably make a little bit more money from that silliness.