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Educational Programming Video

The Value Line Mutual Fund Survey
Program 4: Keeping Track of a Mutual Fund


In the last two sessions, we discussed what a mutual fund is and we reviewed some of the advantages and disadvantages of owning these funds. In this session you will learn how to keep track of a mutual fund.

Every financial asset is bought or sold at a certain price. For a mutual fund, this price is called net asset value or NAV for short. The NAV is derived by taking the total value of all of a fund's holdings at any one time and dividing that sum by the number of shares outstanding. NAV is the value of one share of the fund. Although this is an important number to know, there are other numbers that you should be aware of.

Dividends, dividend yield, and capital gains distributions are three terms you should get to know very well.

For a common stock, a dividend is a portion of the issuing company's net profit that it distributes to shareholders. This is a dollar and cents figure and taken alone does not allow for easy comparisons between stocks. To facilitate comparability, investors calculate the dividend yield by taking the dividend and dividing it by the company's current stock price. So the dividend yield for a company that has a stock price of $10 and paid out a $1 dividend would be 10% or 1 divided by 10. Dividends are normally paid quarterly.

A mutual fund, however, is a collection of stocks that may or may not pay dividends. Thus, the mutual fund will collect all of the dividends paid by the companies that it holds and, after subtracting fund operating expenses, will pay them out to you at set intervals, usually quarterly. Unlike many individual stocks, mutual funds don't have a set dividend rate because stocks are being bought and sold all the time. As such, you can't expect to get the same amount of dividends next year as you did this year. The dividend yield, meanwhile, is calculated by taking the fund's dividend payments over the past 12 months and dividing that number by the fund's current NAV.

A capital gain, in common usage, is the amount of money an investor makes from a transaction. So, if you bought 100 shares of XYZ Corp at $10 a share and sold it at $20, your capital gain would be $1,000. A fund, however, is making trades all year long and, thus, capital gains and/or loses are being created all year long. At the end of the calendar year, the total gain (if there is one) is distributed to shareholders as a capital gains distribution. It is important to remember that you have no control over what a manager buys and sells. That means that you have no control over the capital gains and losses that a fund incurs. You won't know until the end of the year if you are going to have to pay Uncle Sam any capital gains taxes.

You should note that a mutual fund's share price will drop by the amount of any distribution it pays. So, if a fund's NAV is $15 dollars at the beginning of the day, and it pays a $0.50 dividend and a $1.50 capital gain, at the end of the day the NAV for that day will be $15 minus $2, the total amount of the distributions paid, or $13.

Most funds allow you to automatically buy more shares with the distributions it pays—commonly called automatic reinvestment. This is similar to, but not exactly like a dividend reinvestment plan that some individual corporations provide for their shareholders. In such plans you buy more shares of a specific company. With mutual funds, you are buying more shares of a basket of stocks—not one specific company. Of course, you can elect to have the money sent directly to you if you don't want to buy more shares.

Net asset values, dividends, dividend yields, and capital gains distributions are the building blocks for tracking a fund's performance. Now that you have a better understanding of these numbers, we will discuss mutual fund performance and the easiest ways to track your funds in the next session.




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