Why did the price of my mutual fund drop in December?

For 2019: The Azzad Ethical Fund (ADJEX) will distribute capital gains to its shareholders on December 18, 2019. Shareholders may see the fund’s share price drop for a couple of days while the capital gains are processed and distributed. The post below should help explain this standard procedure of capital gains distributions for mutual funds in the U.S.

What are mutual fund capital gains distributions?

When a mutual fund realizes capital gains, such as from stock dividends or from selling holdings that had increased in value, the fund must distribute those gains periodically among all fund shareholders. If you own shares in a mutual fund, you will receive a portion of those gains for each share of the fund you own.

While the capital gains are being distributed to the fund shareholders, the fund’s net asset value (NAV) — sometimes called the share price — will be lower. But this NAV drop doesn’t mean that the funds lost money because of this event, so there’s no need to worry. Pooled investments like mutual funds are supposed to work this way.

When a distribution occurs, a fund’s share price drops by the per-share amount of the distribution. If you’re like most Azzad Funds shareholders and you have chosen to reinvest your investment gains in additional shares, you just got more shares of the fund.

Why does this happen?

Mutual funds are required to work this way to qualify for special tax rules available for registered investment companies. They must pay net income and realized capital gains to their shareholders at least once per year. Sometimes this happens monthly or quarterly, but it’s often at the end of the year in December. The reason that distributions occur is because the fund has made money for investors, which is a good thing.

Do I have to pay taxes on mutual fund distributions?

A mutual fund’s distribution of capital gains and dividends is considered a taxable event in the current year. If you own the Azzad Funds in a taxable account, you will receive a Form 1099-DIV showing the gains that were paid to you. If you invest in the funds through a tax-advantaged account like a 401(k), an IRA or a Roth IRA, your distribution will be reinvested and shielded from taxes.

Taxes aside, as an investor you are not harmed by a mutual fund distribution. As mentioned above, for those who reinvest those distributions, you will see that you now own a larger number of mutual fund shares on your monthly statement.

This is a good reminder to look at total return rather than a fund’s share price when judging mutual fund performance. Distributions may reduce the share price, but they are still part of your return as a shareholder.

When the Azzad Ethical Fund distributes capital gains, your December statement will reflect this distribution. If you have any other questions, please call us at 888.86.AZZAD.

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