Why does a mutual funds NAV drop when a distribution is paid?
When profits from sales of securities exceed losses, they accumulate and contribute to the rise of the net asset value (NAV) of the fund. Since a portion of the NAV is being deducted and distributed to the shareholders, the NAV will drop by the distribution amount. For example, a fund’s shares sell at an NAV of $10. If sales of the fund’s securities have realized a profit of $2 a share during the year, a capital gain distribution of $2 will be deducted from the NAV on a specified date – and on that date the fund share price will decline to $8. This drop in NAV does not reflect a loss since the portion deducted from NAV is passed through to shareholders. Distributions do not impact a mutual fund’s total return as they are taken into account as part of a fund performance. Please keep in mind that the NAV will also reflect market activity.
