Why your mutual fund dropped on a day the market was up

On Monday, December 18, the Azzad Ethical Fund (ADJEX) made a capital gains distribution to all shareholders, which resulted in an adjusted net asset value (share price) that is lower than it was as of market close on Friday. This is something that all mutual funds do. ADJEX didn’t “tank,” so there’s no need to worry; pooled investments are supposed to work this way.

When a fund distributes gains, its share price drops by the per share amount of the distribution–but it’s to your benefit. If you’re like most ADJEX shareholders who have their accounts set to reinvest gains and dividends, you just got more shares of the fund, but your account value remains steady.

Why did 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 annually. Sometimes this happens monthly or quarterly, but it’s often once a year during 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 this?

A mutual fund’s distribution of capital gains and dividends is considered a taxable event in the current year. If you own ADJEX in a taxable account, you will receive a Form 1099-DIV showing the gains that were paid to you. If you invest in ADJEX through a tax-advantaged account like a traditional IRA, a Roth IRA, or a Coverdell Education Savings Account, your distribution is 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 ADJEX shares on your monthly statement. If you don’t reinvest gains, you’ll get the distributed gains as cash.

This is a good reminder to look at total return (the value of your account) 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.

Your December statement will reflect this distribution. If you have any other questions, please call us at 888.86.AZZAD.

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