On Friday, December 18, the Azzad Ethical Fund (ADJEX) made a capital gains distribution to all fund shareholders. This means the net asset value (NAV) – sometimes called the share price – was lower at the end of the day than it was at market close the day before. But this NAV drop doesn’t mean that ADJEX lost money because of this event, so there’s no need to worry. Pooled investments like mutual funds are supposed to work this way.
When a mutual fund realizes capital gains, such as from stock dividends or from selling holdings that had increased in value, the fund must distribute those gains periodically among all fund shareholders. If you own shares in a mutual fund, you receive a portion of those gains for each share of the fund you own.
When a distribution occurs, a fund’s share price drops by the per-share amount of the distribution. If you’re like most Azzad Funds shareholders and you have elected to reinvest your investment gains in additional shares, you just got more shares of the fund.
Why does this happen?
Mutual funds are required to work this way to qualify for special tax rules available for registered investment companies. They must pay net income and realized capital gains to their shareholders at least annually. Sometimes this happens monthly or quarterly, but it’s often once a year during December. The reason that distributions occur is because the fund has made money for investors, which is a good thing.
Do I have to pay taxes on this?
A mutual fund’s distribution of capital gains and dividends is considered a taxable event in the current year. If you own the Azzad Ethical Fund in a taxable account, you will receive a Form 1099-DIV showing the gains that were paid to you. If you invest in the fund through a tax-advantaged account like an IRA or a Roth IRA, your distribution is usually reinvested and shielded from taxes.
Taxes aside, as an investor, you are not harmed by a mutual fund distribution. As mentioned above, for those who reinvest those distributions, you will see that you now own a larger number of mutual fund shares on your monthly statement.
This is a good reminder to look at total return rather than a fund’s share price when judging mutual fund performance. Distributions may reduce the share price, but they are still part of your return as a shareholder.
Your December statement will reflect this distribution. If you have any other questions, please call us at 888.86.AZZAD.