What are capital gains and income?
A capital gain occurs when a security is sold at a greater price than the price paid to acquire it. For example, if a stock is purchased at $10 a share and is later sold for $15 a share, the capital gain is $5. Capital gains are typically categorized as “short-term” or “long-term”:
- Short-term capital gains occur when stocks are bought and sold within one year – they are usually taxed at a higher tax rate.
- Long-term capital gains occur when stocks are sold more than one year after their original purchase date – they are typically taxed at a lower rate.
- Dividends — Portfolio holdings within mutual funds can often pay dividends. These dividends are simply corporate profits paid to stockholders of public companies.
- Interest Income — Mutual funds can also earn income if they earn interest from having money in a bank or from interest payments they may receive from bonds that they own.
When mutual funds distribute these sources of interest income and dividends to shareholders, it is referred as an income distribution.
By law, mutual funds are required to distribute capital gains and income to fund shareholders. The distributions are taxable unless the shares are held in a tax-deferred account such as a 401(k) or IRA. Please be sure to consult with a licensed tax professional for details on how a distribution will specifically affect you.
How are capital gains and income distributed?
Capital gains and income may be distributed either in cash or reinvested in shares of the mutual fund held. Most Ariel Investments shareholders find it beneficial to reinvest their distributions. By reinvesting your distribution, you can benefit from the power of compounding—the concept of allowing your earnings to make additional money for you. As a convenience to our shareholders, we automatically default all accounts to reinvest distributions unless a shareholder instructs us to pay the distributions in cash.
What happens to my account when a distribution is paid?
When a mutual fund pays a distribution, its Net Asset Value (NAV) decreases by the dollar amount of the distribution. Your account value does not decline by the amount of the distribution because you receive more shares at a lower NAV.
For example, Mr. Tortoise holds 100 shares of the Patient Investors Fund which has a net asset value (NAV) of $50. The Patient Investors Fund declares a $10 capital gains distribution, decreasing the NAV to $40. Since Mr. Tortoise’s account is automatically setup to reinvest distributions, his capital gains ($10 x 100 shares = $1,000) will pay for 25 additional shares of the Patient Investors Fund ($40 x 25 shares = $1,000).
Account balance before distribution = $5,000 (100 shares x $50 NAV)
100 shares x $10 capital gain distribution = $1,000
$1,000 / $40 (NAV on ex date) = 25 shares purchased
Account balance after distribution = $5,000 (125 shares x $40 NAV)
Please note: This example does not take into account the fluctuation that your account may experience based on daily market activity.
What are the record, ex, and payable dates?
Any investor who is a current shareholder of the Fund on the record date will be a recipient of a distribution.
- The record date for the 2015 capital gains distribution is Wednesday, November 18, 2015.
- The record date for the 2015 income distribution is Tuesday, December 29, 2015.
The ex-date is the date the NAV decreases by the total distribution amount. Shareholders who reinvest their distributions will receive additional Fund shares at an amount that will offset the NAV decrease.
- The ex-date for the 2015 capital gains distribution is Thursday, November 19, 2015.
- The ex-date for the 2015 income distribution is Wednesday, December 30, 2015.
The payable date is the date shareholders who do not elect to reinvest their distributions are sent their payments.
- The payable date for the 2015 capital gains distribution is Thursday, November 19, 2015.
- The payable date for the 2015 income distribution is Wednesday, December 30, 2015.
If you have any questions about any of these distributions, please contact an Investment Specialist at 800-292-7435.