WHY DOES THE UNIT PRICE OF A 
FUND FALL AFTER A DISTRIBUTION? 

Throughout the year, a mutual fund receives dividends from Canadian and foreign stocks, interest from bonds and short-term notes, as well as capital gains when securities are sold at a profit. This total income is added to the fund and is reflected daily in the fund's unit price reported in the business section of most daily newspapers. 

A mutual fund distribution represents a portion of the total income that a mutual fund earns during the year. 

Let's look at an example:

You own 100 units of a mutual fund. On December 31st, before a distribution, the fund is valued at $10 per unit. Therefore the total value of your investment is $1,000. 

On December 31st, the fund managers review the income the fund has received. This total income is divided by the units in the mutual fund. In this example, it results in a distribution of $1.25 per unit. Each unitholder receives a portion of this income in proportion to the number of units he or she owns. Therefore, you receive a distribution payment of $125, i.e., $1.25 per unit multiplied by 100 units. 

A new unit price for the mutual fund must now be calculated. To do so, take the unit price for the mutual fund before the distribution and subtract the per unit distribution, i.e., $10 - $1.25 = $8.75. Therefore, the new unit price for the mutual fund is $8.75 per unit. 

The next step is to calculate the number of units that distribution amount of $125 would purchase at the new unit price, i.e., $125 divided by $8.75 per unit = 14.286 units. These units are then reinvested or redeemed for cash. 
 
 

	Before distribution	After distribution
Number of units	100 units	114.286 units
Unit price	$10.00	$8.75
Value of investment	$1,000.00	$1,000.00

If you reinvest the distribution, your account will still be worth $1,000, but you will now have 114.286 units. On the other hand, if you prefer a cash payment for the distribution, you will receive a cheque for $125. Your account will still have 100 units, but at the new unit price of $8.75, your investment would now be valued at $875. 

Most investors reinvest their distribution to take advantage of the power of compounding so that they have more units working for them and their investment goals.