AboutJohn D Smith, CFP Expertise I can answer detailed questions regarding mutual fund investing, retirement planning, education planning and related financial planning/investment issues. I have a B.S. degree in Financial Planning & Counseling. I am also a Certified Financial Planner practitioner and have performed fee only investment management and financial planning services for the past 11 years.
Expert: John D Smith, CFP Date: 6/27/2005 Subject: Selling shares of a bond fund that accrues dividends daily.
Question Hi, I'm passing this question your way since you offer to "answer detailed questions regarding mutual fund investing". With the fear of rising rates, other people might be interested in this question about selling shares of a bond fund.
When you sell shares of a bond fund that accrues dividends on a daily basis, is the accrued dividend simply part of the NAV received at the time of sale?
A bond mutual fund (American Funds High-Income Trust - AHITX, others may be similar) "accrues dividends on a daily basis". There is also typically an ex-dividend date once a month, which is the date on which the NAV is reduced by the amount of the dividend for the past month.
Suppose, for example, you buy a share of a bond fund for $15. The fund accrues dividends on a daily basis and deducts dividends from NAV monthly. Later, you sell when the NAV is $20 and the accrued dividend is $0.10. Is your sale price effectively $19.90 giving a capital gain of $4.90 and income of $0.10? (There might, of course, be other dividend payments before the $0.10.)
That is, does the fact that the fund accrues dividends on a daily basis simply change the "character" of your income (ordinary vs. capital gain) without changing the amount you receive per share on sale?
Thanks for your time! :-)
Answer Like all mutual funds, the NAV of a bond mutual fund at the end of each day is a function of the market value of the underlying bonds inside of the portfolio. When a distribution occurs (typically at the end of each month) the NAV is then adjusted for this distribution and reduced accordingly. Whether this distribution is considered capital gains or income depends on the nature of the distribution and how the fund company reports it. However, in most cases, the income distributions that occur from bonds funds are characterized as ordinary income since most bond funds pass through the interest of the underlying bonds to the shareholders each month. Most reportable gains from bond funds are the result of the shareholder selling shares of the fund at a NAV greater than the original purchase value due to the price of the underlying bonds gaining value (usually in a decreasing interest rate environment). However, this gains could also result from the mutual fund manager selling bonds inside of the portfolio at a gain. I hope this is helpful. If my answer is not clear, please do not hesitate to contact me for further clarification.
