Has this ever happened to you? You check on your mutual funds' progress every few days or weeks, and you see that they've gone up a smidge or down a smidge. No big deal. But then one day. yikes! Your fund has dropped a lot more than usual. What's up?
Well, that's the same question that several folks recently asked on our Mutual Funds discussion board. Dlcapo, for example, reported that he owns a good bit of Mutual Discovery Fund
Fortunately, the news wasn't so bad. The explanation: distributions of dividends. As Foolazis explained: "I would check on the fund family's website to see if they've had a distribution of dividends and/or capital gains. This is the time of year when most funds make their capital gains distributions. If you are reinvesting dividends, then your number of shares will increase, so that your total money invested remains the same."
Here's a little extra info. Oakmark International I recently sported a dividend yield of 2.53%, and its top holdings included GlaxoSmithKline
As the conversation continued, TMFJester offered a link to the Oakmark website, which offered distribution details. He also confessed to being a bit taken aback by the size of the Oakmark drops.
Jbking chimed in: "Don't forget about how capital losses work. If a fund has built up lots of capital losses, these are carried forward until they are used up. Thus, the declining market from 2000-2002 could give some funds nice tax efficiency for a time while they use up the losses."
He also noted: "The distributions are to pass on the tax liability to the shareholders of the fund. If the fund is held in a tax-advantaged account such as a 401(k) or IRA, then this is just moving around some of the money, [and] if you choose to not re-invest the money, then you'll have some more in the money market or whatever account you designated the distributions go into."
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.