Question

Question #5 Normally, capital gains earned in the mutual fund during the year are paid out to the investor as capital gains, at the end of the year.

REQUIRED:

a) What happens in a year in which the mutual fund suffers net capital losses.

b) What happens, if anything, to the Net Asset Value of a mutual fund after it pays out to investors all of the income it earned during the year.

Answer 1

Mutual fund asset sold within the fund's portfolio for more than it cost to generate capital gain. When prices are low, stocks should be boughtbought and then sold when prices are high. Holdings are liquidated when they are at premium to distribute the gains to shareholders.

a) Mutual fund suffers net capital losses in a year

Loss can be claimed from mutual fund investment, if the loss is realized loss, that is person must have sold some or all of the shares before the end of the year. If any of fund shares is not sold, loss is unrealized meaning that the loss is not fixed or final. As long as person still own the shares, their value could go up next week, next month or next year. The loss is not "real" until you sell the shares and receive a lower price than you paid. You may only take a tax deduction on realized losses.

b) Net asset value is the market value of mutual fund unit. It is just the total value of the mutual fund scheme investments less liabilities and expenses.

NAV of the scheme keeps changing according to fund performance. Dividend is distributed by the fund depending on the distributable surplus that the scheme has accumulated. This is regular income to investors.

The Net Asset Value will fall proportionally and get readjusted after the dividend is paid. NAV is also impacted by changes in prices of securities invested in.

The declared dividend may also be re-invested by buying additional units of the scheme. The dividend amount would automatically be utilized to buy additional units which would be added to your existing holdings.