If you’ve seen a huge drop in your mutual funds over the last few days, DON’T PANIC!!!

What’s happening is that a number of mutual funds are making their annual required disbursements of dividends. For the investor unfamiliar with this (like I was last year) it can be a scary thing to see your investments seemingly plummet downward at double-digit percentage rates.

If you wait a few days, you should see a reinvestment of the dividend amount into your account.

Here’s the Process

Fund shares are sold at what’s know as the Net Asset Value, (NAV).  Each day at the end of trading, the stocks, bonds, cash, and other assets of the fund are calculated at their market value(s). That’s the NAV for the day. This is also why mutual funds don’t report share price changes until after market close.

The assets of the fund pay returns back to the fund; stocks pay dividends to the fund, etc. These dividends stay in the fund as cash which causes the fund price to rise (more value because of the cash reserves). Annually the Mutual Fund distributes this money as dividends which reverses the original effect of the money; NAV drops as the money goes out.

But what actually happens with most funds is what’s called a DRIP (Direct Re-Investment of Profits). This DRIP comes in the form of stock purchases made on your behalf.

Mutual Fund Dividend -> New Stock purchased at the New NAV.

So in effect, after a few days, you should have MORE stock at a LOWER $/share price. This comes out to a total dollar amount that should be equal to the original amount. (+/- fluctuations in the recent days).

Don’t Sweat the Small Stuff

Since most investing should be made for the long term anyway, bur ps and bumps like this should not be an indicator to sell. It’ll settle down in a few days and everything will be back to normal.