# How to make your own Mutual Fund

A Dividend Growth portfolio is well suited to be viewed as a mini-mutual fund since it’s an allocation to a specific set of dividend growth stocks held with a long-term buy and hold strategy in mind. Here’s how you can makeΒ your own mutual fund from your stock portfolio.

But before we begin, the inspiration and credit for this post goes to The Investor’s article on How to unitize your portfolio at the Monevator blog. AndΒ a special mention also to Weenie from Quietly Saving who led me to it in one of her articles.

There’s some math involved in the introduction part of this article. The following link skips the theory and gets to the practical part.

Skip the Math, show me the index!

## Measuring performance

The main focus on a DGI portfolio is the dividend income itself, and calculating portfolio performance via total return is of less importance. But some bloggers like to report their portfolio value and sometimes the growth.

Now supposing your stocks at the start of the month are worth \$10,000 and at the end of the month they’re worth \$12,800. This is an increase of 28% (12800 / 10000). But growth really means the increase (or decrease) that the investments did all by themselves. Perhaps you purchased more stocks in the middle of the month; perhaps stocks were sold – what would the growth be then?

In my monthly summary posts I use a simple formula to calculate growth on a month-to-month basis:

Growth = (Month End – New Capital) / Month Start

So using the starting / ending figures above and a new purchase of \$1500 of shares I would get

Growth = (12800 – 1500) / 10000 = 13%

The ‘New Capital’ amount may be positive or negative depending on the amount of shares bought or sold. This formula simply removes any new capital from the final portfolio value and so it approximates what the end result might have been had those purchases not been made.

This is just an approximation and a more accurate method would take into account the date on which any purchases or sales were made. Consider what actually happens in the real-world using the example above.

The starting amount was \$10,000 but because we’re in the real-world now, we need a date. Let’s go with 01-Jan-16. So on 01-Jan-16 we own \$10,000 of a collection of stocks; it doesn’t matter which ones or how many since we’re looking at the portfolio as a whole. Starting from the beginning of January, the market will move however it does and the value of that \$10,000 will change daily. This is the typical “growth of \$10,000” chart that is commonly used to contrast investments.

On the 20th January, the night before making the \$1,500 purchase, we look at our brokerage account and see that the current market value is \$10,500. \$10,000 turned into \$10,500; a 5% increase. That’s great so we buy \$1,500 more!

It’s unlikely that the new purchase will continue with that same 5% growth rate; nor is it likely that the \$10,500 will grow another 5%. By making the \$1,500 purchase our total return is now affected by a second growth rate as well as the historical growth from the start of the month until the purchase date.

Fast forward to the end of the month where we look at our statement again and see \$12,800 as the end of month balance. We notice that the \$1,500 purchase ended up being worth \$1,600 and that the \$10,000 ended up being \$11,200. \$11,200 + \$1,600 = \$12,800 and we’re happy!

The \$10,000 starting amount yielded \$11,200 or 11.2% while the \$1,500 had a 6.67% growth. These values can be averaged and combined in a number of ways to produce a “total growth” percentage; two common methods are Money-Weighted and Time-Weighted. Both methods provide different results yet both are correct in their own way.

## Money-Weighted Return

I’m just going to mention this briefly and then move along. With this method, the inflow and outflow of cash and their timing influences the weighting and final value. This is a common method for stock portfolio rate of return calculations. It’s a single rate of return value that can be applied to each transaction weighted by quantity and date which produces the final amount.

To calculate it, you use the XIRR function in Excel which given the values above, results in 314.8%. This is an annualized result however, to get the monthly result you must reduce the rate by the duration, in this case 31/365 days. The final result becomes

Monthly rate = (1 + 3.148)^(31/365) => 12.843%

This method makes my brain-cell hurt, so I’m going to copy what fund managers do to report their fund’s performance instead and that’s using a Time-Weighted method.

## Time-Weighted Method

The Time-weighted method weights the investment performance equally by time and it doesn’t care about relative amounts of money because it uses the geometric total of the investment growth. In the example we worked through earlier we saw:

\$10,000 -> \$10,500 -> \$11,200
\$1,500 -> \$1,600

The numbers in the example relate to a 5% growth from 1st Jan to 20th January followed by a 6.67% growth from 21st January to 31st January; for example \$1600 / \$1500 = 11200 / 10500 = 1.0667 (6.67%).

So in this case the time-weighted result = (1+0.05) x (1+0.067%) = 12%.

I mentioned this is how professional fund managers calculate their returns. The benefit of this method is that the results can be compared to other fund returns since the mutual fund industry is required to use them. So let’s put the theory into practice and make our very own mutual fund!

## Making a mutual fund

I’m going to use real numbers from my Income Fund starting from 1st January this year. My Income Fund consists of stocks, stock funds, cash and bond funds; they’re all going to get combined into my index as I’m looking at my Income fund as a whole.

### Step 1: Starting value

The first thing to do is look up the starting fund net asset value. This is the total market value of the assets in the fund. For mine it’s simply the market value as of 31 December 2015 which is also the starting market value on the 1st January 2016, and it’s \$215,011.28.

### Step 2: Choose a unit value for your new fund shares

Next you just need to pick the starting value of your virtual fund shares. This is entirely arbitrary; the higher the value the fewer shares you start with. I’m going with \$100 per share and we’ll call this share value the “Unit Value” going forward.

1st January: Unit Value = \$100

### Step 3: Calculate your starting number of fund Units

The starting number of fund Units is the Net Asset Value dividend by the Unit Value. So that’s equal to

Number of Units = 215011.28 / 100 = 2,150.1128 Units

### Rule #1: Number of Units x Unit Value = Net Asset Value

At any time, the number of units multiplied by the unit value is equal to the market value of the fund assets. We’ve only just declared the shares but a quick sanity check shows

Fund Assets = 2,150.1128 shares x \$100 = \$215011.28

### Rule #2: Changes in Fund Asset values changes the Unit Value

As the market prices of your Fund Assets change, the number of Units in your Fund never changes; only the Unit Value does.

Unit Value = Fund Asset Value / Number of Fund Units

### Rule #3: The number of Units only changes when you buy or sell Fund Assets

The main thing to keep track of is external money added or removed from the Fund Assets. Each time external money is involved you must buy or sell Fund Units. Here’s a worked example from the 4th January when I bought \$250 of VHDYX on the same day.

January 3rd was a Sunday, so the Unit Value of my fund was still \$100, and I had 2150.1128 Units. At the end of the 4th of January the total market value of investments reduced to \$213,130.98.

4th January: Unit Value = \$213130.98 / 2150.1128 = \$99.1255

In buying \$250 of VHDYX as an automatic transaction from my checking account,Β  I must ‘buy’ more Fund Units at the same \$99.1255 price, so I added 2.5221 units.

So on the 4th January I had 2150.1128 + 2.5221 = 2152.6349 Units and the asset value of the fund increased \$250 to \$213,380.98.

That’s a 100 – 99.1255 = 0.8745% drop on the first day of virtual trading.

The good news now is that I simply need to look at the Unit Value to see my Income Fund performance on any given day.

### Handling of dividends

If you re-invest dividends (or interest) from Fund Assets you don’t need to do anything with Fund Units; the re-invested dividends will increase the market value of your Fund Assets and hence increase your Unit Value.

However, if you withdraw dividends (or interest) as a distribution, the number of units remains the same but the capital value decreases. The total dividend payment is divided by the number of units to determine the DPS and withdrawing the dividend cash reduces the capital value of the fund. I found this an interesting point since it reinforces the point that ‘spending’ dividends is withdrawing capital.

In my particular investment scheme, all dividends are paid monthly into my money market account and then I transfer the total monthly dividend amount in one go to my checking account where it gets re-invested with automatic payments the next month. This counts as a distribution; however dividends being paid into my money market account isn’t considered a distribution at that time since the money market account is part of the Fund Assets.

In the same way, if I was to purchase new shares with money from my money market account that also wouldn’t require buying new Fund Units; that’s simply a reallocation of assets from one asset type to another and it’s all contained within the Fund Assets. But re-investing the ‘distribution’ after it’s been paid is an external transfer and would trigger a Fund Unit purchase.

### January results to date

I ran through the remaining transactions in my Income Fund up until 23rd January and the results are shown below. I use two tables in an Excel file; one a table of transactions and the other is the master Fund Asset list.

 Date Type Amount Unit Price # Units 1/4/2016 DISTR 90.77 99.1255 0 1/4/2016 BUY 250.00 99.1255 2.5221 1/5/2016 BUY 750.00 99.3755 7.5471 1/7/2016 BUY 125.00 97.4713 1.2824 1/10/2016 DISTR 130.22 96.8885 0 1/11/2016 DISTR 62.57 96.7543 0 1/12/2016 BUY 250.00 96.8902 2.5802 1/15/2016 BUY 250.00 95.334 2.6224

I have a lot of automatic transactions that dollar cost average into Fund Assets plus I’ve been buying more on account of the market drop this month; the distributions are dividend transfers as I mentioned above as I never actually sell units to myself.

## Original example re-worked

Edit: 24-Jan-16. Showing the 12% increase calculated from the example using the unitization method

Here’s the original example of \$10,000 growing to \$12,800 with a purchase of \$1,500 done using the unitization method.

 Date Total Value +/- Units Total Units Unit Price (\$) Start (\$10,000) 1/1/2016 10,000.00 100.00 100.00 Balance 1/20/2016 10,500.00 100.00 105.00 Purchase (\$1,500) 1/21/2016 12,000.00 14.29 114.29 105.00 End 1/31/2016 12,800.00 114.29 112.00

You can see that the final Unit Value is \$112; an increase of 12% from the starting \$100 value. This matches the 12% gain on investment from the earlier Time-Weighted calculation. We also gained 14.29 units as a result of the purchase, the only additional assumption for simplicity being that the market value didn’t independently change on the 21st except for the new capital added (i.e. the Total Value of the 21st was the Total Value of the 20th plus \$1,500).

## Summary

As of the end of January 2016, my Income Fund started the month at \$215,011.28 and decreased to \$212,642.17 by the end of the month. This is a decrease of 1.10%. However I purchased \$2,250 of new investments during the month.

The underlying performance can be see via the change in unit price from \$100 down to \$97.9074 or a decrease of 2.0926 % as of 31-Jan-16.

In this post I found three different growth values for the same example: 13% with a simple approximation; 12.843% via Money-Weighted returns and 12% via a Time-Weighted return. When making any comparison of growth, it’s important to know the calculation method and timeframe that the growth values correspond to.

### Quote of the day

Life is really simple, but we insist on making it complicated.

## 26 thoughts on “How to make your own Mutual Fund”

1. Ciao DL,

I was starting to study how to do something like that for my blog and got all the answers here, I cannot tell you how much I appreciate this post!! Thanks a lot!

Stal

1. Hi Stal,

You just did, thank you π I’m glad you found it useful.

Best wishes,
-DL

1. Ciao DL,
I have a question for you (will probably sound stupid but I want to make sure about this point). Let’s say that I start with a 10000 USD fund, and I transfer the money to the fund coffers. The fund manager (me) invests 5000 in a stock, and 5000 decide to remain “liquid”. During the year he uses that 5000 to buy several stocks, but money never goes out of the fund itself. In this case there is no change in the amount of shares that the fund generated at the beginning of the year, correct?
I am asking this because in my PF I keep the three currencies that I trade in also in liquid form, and I really only add funds through my savings during the year (hence increasing the shares of the fund if I understood correctly). All the dealings (taxes, interest, dividends, buy/sell) happens “within the fund”.
I have the starting investment made in 2014 and all the cash payments into the funds, calculating the index and number of outstanding shares should be doable with this data (even if I do not have the “net worth” saved each month), right?
Ciao ciao and thanks!
Stal

1. Hi Stal,

For your first point yes, that’s correct. If you start the fund with \$10,000 in a liquid account and then buy \$5,000 of stock; only the initial \$10,000 transaction would count as money coming into the fund (Inflow). So you’d create 100 shares at \$100 and you’d continue to hold 100 units as long as you didn’t withdraw any cash from the liquid account. Likewise if you sold shares and the proceeds went back into the liquid account that also doesn’t count as a withdrawal (Outflow).

You setup with the savings account sounds similar to how I’ve set mine up; my money-market account in my brokerage account counts as the liquid cash portion of my fund so I just include the value of it in the net worth calculation, and I only count transfers from my money-market account to / from to my checking account (in your case savings account) as Inflow or Outflow.

For your second question, you will need to know the net asset value on the day before any cash payment into the fund; this information is needed to calculate the price of the new shares that the cash payments are buying. You’d have to lookup historical stock prices in Yahoo Finance or somewhere for those particular days if you don’t have records as well as determine the value of your liquid accounts on those days.

Say that you started the fund on 01 January 2014, the starting Unit value was \$100 and you know from your records that your second injection of \$10,000 cash was on 4th February. The Unit Value of your Fund won’t be \$100 on the 3rd February since you bought some stock in January and they increased in price. You first need to know the Unit Value of the fund on 3rd February (net worth of the stocks you own + liquid cash divided by the number of Fund Shares) to calculate the new Unit value; let’s say it was \$114. So your second injection of \$10,000 on 4th February would buy 10000/114 = 87.7193 new Fund Shares and you would increase the total number of Fund Shares by that amount.

I chose to start tracking from the beginning of 2016 for that reason because it wasn’t worth for me to go back and recalculate all of that. The other reason I’d suggest you just start from 2016 onwards is that the returns of your initial investments in 2014 are going to be heavily based on the performance of the smaller quantity of stocks that you started with. Since your portfolio is larger now its performance will be more averaged.

Best wishes,
-DL

1. Ciao DL,

I have one more question… I give you this example based on a simulation that I am running:

I start with 210 Euro and create 210 shares worth 1 euro each. Portfolio looses and goes to 0.9591 Euros, this is when I buy 2 euro worth of shares (2,085 shares).

At the end of the day I own 212.085 shares. At the end of the day of trade I have a NAV of 201.34628 Euro, this gives me a price of 0.9494 = to a loss of 5.06%.

So far so good.

If I take the difference between the total investment (212 Euro) and the current NAV I get 10.62462, which is 5,02% of 212 Euro.

Which one is right? -5.06 or -5.02? I can’t understand why there is a different result showing…

I am sure that there is a perfectly sound reason but I am failing to grasp it…. π

2. Hi Stal,

The difference is because you’re comparing two (slightly) different things.

With the -5.02 % you’re calculating that you started with 212 Euros on day 0 and that it turned into 201.34628 Euros or a -5.02% drop. However this isn’t what happened. (*)

What actually happened is that you started on day 0 with Purchase #1 of 210 Euros. This lost some money on day 1 and so Purchase #1 became 201.411 Euros. Then you made a second purchase (Purchase #2 of 2 Euros). On Day 2 Purchase #1 dropped some more and Purchase #2 also dropped a little bit. But combining those values together gets you a combined loss of 5.06%. This is weighted so it’s an approximation but it’s more accurate than assuming you started out with 212 Euros on day 0.

I obtained the same results you did so I think your calculations of -5.06 are correct.
Hope this helps,
Best wishes,
-DL

(*) Had you actually invested 212 Euros on day 0 instead of 210 you’d have ended up with a different result than -5.02% since you would not have ended up with 210.34628 Euros in the first place. You only ended up with 210.34628 Euros because you made investments at two separate times. Imagine how distorted this approximation of performance becomes if the two investments were made 10 years apart.

2. SDGI says:

thanks DL , very helpful article , i have question : for DGI , when we buy individual stocks , we don’t buy basket of stocks at one go , i.e. we choose the best discounted DG stock at the time of investment , how this impact the unit price ?

1. Hi SDGI,

Yes I was probably abusing the words Index Fund a little, but I meant that as you build up your DGI portfolio, whether it’s one stock at a time or multiple stock purchases per month based on your buying criteria, you can measure the performance / growth of the portfolio in the same way that mutual funds do. This allows you to compare your portfolio growth to any index / mutual fund you wish, or just to see how it’s improving for your own interest.

The calculation method doesn’t care what you actually buy; all it cares about is the total money added and the total value of what you bought. How you construct your fund / portfolio and what it contains is entirely up to you.

Let’s say at the beginning of the month your total portfolio (regardless of how many stocks are in it) was worth \$20,000 and you had previously determined you owned 2000 Fund Units which are worth \$10 each (2000 x 10 = 20000).

You then buy \$745 worth of JNJ because you consider it a fair value. So you create \$745 worth of the Fund Units (74.5 of them at \$10 each) ending in a total of 2074.5 Fund Units. At the end of the day, your total portfolio value is (say) \$20,850 because the JNJ shares went up along with the rest of your shares. Your 2074.5 Fund Units are now worth 20800 / 2074.5 = \$10.05061 each. This means they increased in value from \$10.0 to \$10.05061 which means your overall portfolio growth on that day was 0.5061%

On a pure size level your portfolio grew from \$20,000 to \$20,800 which is a 4% growth but that ignores the fact that you helped it grow due to \$745 of new purchases.

For the purpose of calculating overall growth of your portfolio, it didn’t matter that you bought JNJ shares; nor did it matter how many you bought, nor does it matter how many real shares you own in your stock portfolio. All that matters is the new money added (creates Fund Units) and the Unit Value (determined from the end of day market value).

Best wishes,
-DL

3. This is a really cool approach to assess your own success as an investor. I like that math and principles behind this. I apples a lot to the geek in me! Thx
I look forward to see what result it produces for you and others.

1. Hi Ambertreeleaves,

I’m certainly having fun with it to compare against the markets. I don’t use the performance results to change any investing decision or allocation but it’s useful to see the real performance after taking into account any new capital added.

Thanks for stopping by and commenting!

Best wishes,
-DL

4. Ciao DL,
Need to reply here as the space to make “replies” has run out…. Totally understood and now it’s all clear, over a long period of time the difference can be very big.
Thanks again, I will crunch more numbers, surely I will come up with new questions…. π
Ciao and thanks!
Stal

1. Hi Stal,

Great! Feel free to ask any questions as I’m learning too π I may publish the spreadsheet I’m using to do my calculations as a kind of template but it needs some more work before it’s fit for public consumption!

Best wishes,
-DL

5. Ciao DL,
As I expected I have one more question. I might know the answer but I’ll shoot anyhow. I started with 210 Euro, and 2.1 shares at 100 Euro value. Made subsequent investments for a total of 224 euro (14 euros added to the fund), 2.247 shares. The extra shares were bought at below 100 euro values. Now we are back at 100.38 euro per share, for a NAV of 225.6 euro, technically I should have a gain of 1.6 euro on the 224 initially invested (0,71%), but the value of my shares is 100.38, which means that the performance of the fund is 0.38%. Am I comparing two different things as usual or am I missing some points somewhere?
Ciao and thanks!
Stal

1. Hi Stalflare,

I tried to recreate your numbers but I’m not sure I got them exactly. Since the numbers are small, a small amount makes a big difference in the result. But I obtained a different answer than you – could you send me an example excel file of how you calculated yours?

I ended up with a unit value of \$100.6946 with a total of 2.2404375 units (assuming the 14 Euros of shares were bought when the unit price was 99.68847)

The first purchase of 210 Euros worth of investment became 209.3458 Euros => a 99.6858% return

Then when you added another 14 Euros of investment, you turned 223.3458 Euros into 225.56 Euros – a 101.0093% return.

0.996855 x 1.010093 => 1.006946 or a 0.69% increase in the unit price.

I’m still learning and I’ve not seen many worked examples where inflows are made on the same day as market valuation changes so that may account for the variation. In my own file I use end of day numbers but I subtract the inflow amount from the value I use to calculate the price. E.g. if I have \$1023 total investment at the end of day1 and I add \$100 during day 2 with the total amount becoming \$1207 at the end of day 2; I calculate the day 2’s price as (\$1207 – \$100) / number of units and add (\$100 / day 2 price) worth of new units.

Since any new money is added to a market account first with zero price movement, I think this is correct. For most mutual funds, new shares are purchased after the close of the market when the price has already been established.

Best wishes,
-DL

1. Ciao DL,

Ok here it goes:

210 Euro – 100 Euro value – 2.1 Shares created
Added 2 euro – 95.91 share value – 0.0208 Shares bought
Added 1 euro – 92.84 share value – 0.0107 shares bought
Added 10 euro – 94.40 share value – 0.1059 shares bought
Added 1 euro – 96.49 share value . 0.0103 shares bought

In total now I have 2.2477 shares, for a total amount invested in the fund of 224 Euro.

So far so good.

Now the markets are a bit nicer on us and the NAV of the fund is 225.641 giving me a price of 100.38. As I started at 100 euro with the initial 2.1 shares, the fund is now +0.38% compared to the initial point.

But the NAV tells me that the “real gain” has been 1.641 Euros, or 0.73% on the total sum invested (224 euro).

As to when I calculate the shares I do it at night when markets are quiet and also exchange rate are not fluctuating all that much.

Hope it’s clearer, and I think I might be comparing different things here, but I am still a bit puzzled π

ciao and thanks

Stal

1. Hi Stal,
Man you’re giving my brain cell a work-out this morning and I’ve only had one cup of coffee! π I could recreate your numbers. The difference you’re seeing is that the change in unit price is only one half of the picture. You also added 0.1479 shares which are worth 0.1479 x 100.3779 => 14.8474 Euros.
So the total increase in value was (210 x 1.0038) + (0.1479 x 100.3779) = 210.7936 + 14.8474 = 225.6410 or a 0.73% gain on the cost basis of 224.

Are these actual new contributions you’re making or are they dividend payments which should not result in additional shares?

Anyway here’s a contrast of the calculation methods which tries to explain the difference. First, let’s ignore any new capital added and just go with the returns on each investment period.

 Start of period End of period Gain 210.0000 201.4110 0.9591 201.4110 196.9000 0.9776 196.9000 201.2347 1.0220 201.2347 215.9013 1.0729 215.9013 225.6410 1.0451

If I multiply out the gains 9.9591 x 9.9776 x 1.0220 x 1.0729 x 1.0451 => 1.0745; the same result as 225.641 / 210.00

Now the above result didn’t include the fact that you bought more stock and added money. Now I’m assuming that the end of investing period values above are correct but they should be the value from your end of day brokerage statements; here’s the difference taking contributions into account

 Start of period End of period Gain 210.0000 201.4110 0.9591 203.4110 (+2) 196.9000 0.9680 197.9000 (+1) 201.2347 1.0169 201.2347 (+10) 215.9013 1.0221 216.9013 (+1) 225.6410 1.0403

Adding new capital increased the starting amount of each investment period; the ending amount is the same as before. So in this case multiplying out the gain percentages I get 0.9591 x 0.9680 x 1.0169 x 1.0221 x 1.0403 => 1.0038 or 0.38%. But I also gained 0.1479 shares in addition to the change in unit price.

Best wishes,
-DL

6. Ciao DL,

Thanks for the explanation. The added capital is actually money from the saving account that goes into the investment account (the fund), dividend payments, interest and stuff like that is calculated in the NAV as it increases it, but doesn’t create new “shares” as it’s internal to the fund itself (this was part of the original explanation you gave me actually π ).

My issue now is: if I want to track the investments in the form of a fund, like we are doing, I think that the price should reflect the “total return on cost” that one is having on the investment.

The percentage of 0.38% is just the gain that I am making on the initial 210 euro investment, while 0.75% is the gain that I should have from the total amounts that have been paid into the fund.
Right now I calculate the price dividing NAV/Shares. And I get the 0.38% increase. Maybe I have to consider the single acquisitions and their prices values to come up with an “average share value” that will reflect the 0.75% difference, that’s easy to make.

Thanks for the insight, made me think and found the solution π

ciaocaio

Stal

1. Hi Stal,

Yes I just wanted to confirm that the payments weren’t dividends; new capital means new shares and dividends mean increased NAV as you’ve done.

Out of curiosity, if you consider only the original 210 Euro investment, what was the capital gain on the original amount (i.e. if you hadn’t added more money what would your total be compared to the 225.641 you gained after adding new money)? I’m assuming that at least a little part of the 0.38% came from the additional investments, but that it may not be very large because of the small amounts involved relative to the starting amount.

I found another site which discusses personal returns over at the Bogleheads site. This may be closer to what you’re looking for – I’m going to play with the excel sheet a little this afternoon. It doesn’t unitize the portfolio though, but it does calculate average time-weighted returns.

Best wishes,
-DL

2. A quick update – I just tried the spreadsheet referenced in the Bogleheads wiki and it came very close to my results:

January performance => -1.6957% vs my unit price change of -1.7062%
February performance => -0.5585% vs my unit price change of -0.5732%
YTD Performance from 1 Jan to end of Feb => -2.2447% vs my unit price change of -2.2696%

I’m still curious how the creation of unit shares affects the results since the spreadsheet doesn’t do any of that and considers monthly cash-flows / balances instead.

Best wishes,
-DL

1. Interesting post, will check the excel out… I am in Russia now so I cannot devote a lot of time, but when I am back…. The first run at the excel file returned a marvellous -6.8%, so it’s clearly wrong… π Must have made some mistake… π

1. Hi Stal,

I hope your Russia trip is going well! The more I think about handling “distributions” paying from the Fund (which are separate from dividends coming into the Fund), I think they should be handled just as a decrease in NAV and not as “sell” or outflow which I’ve been doing.

Treating a distribution as a sell reduces the number of units, so with no inflows, over time the number of units will drop to zero.

Whereas for regular mutual funds, a distribution results in a decreased NAV the day of the distribution (i.e. unit price decreases), which if re-invested (a buy) adds more units, but if not re-invested, means no change in the number of units you hold.

Would appreciate your thoughts on this π
Best wishes,
-DL

1. Ciao DL,
Russia is over for now, I am back in Florence π

As I do not know how the funds are managed I could ask my friend who’s heavily in Finance how they really do it at their end. I’ll try asking him at the first possible occasion.

By distribution what do you mean exactly? The way I see it the fund that we set up with the system described above is like one of those “closed funds” that do not make any type of distribution whatsoever.

If we wanted to have a fund that distribute a dividend, then I think that your thinking is makes sense, as the dividend payment to the shareholders would simply reduce NAV without touching the number of shares outstanding.
If you think about it, in a way that’s what happens with stocks. General common sense wants that prior to ex-div the stock “normally” sinks pretty much of the same percentage of the payment (because the company “looses money” and value by paying a dividend). In real life we see that this rule is not always put in practice, but that’s mr.market foolishness I guess.

So yes, if I have to put my 10 cents in, I’d go with decreasing NAV (and share price) for any distribution that the fund gives.

Ciao ciao

Stal

2. Yes for CEF you’re right. In my case I’ve started to withdraw a small percentage of the dividends each month to start paying my living expenses. In reality this simply means I can contribute more of my salary to the fund. But eventually all of my living expenses will come from the Fund so I’m thinking of that withdrawal as a ‘distribution’. I should write a separate post about it really as it’s helping me decide how I should structure my accounts to actually live off dividends.

I made the changes to my excel file and it had the expected result; the overall price has decreased a little because of the distribution but that’s correct and matches the stock / fund model.
Best wishes,
-DL

7. Ciao DL,
I am not at the stage where I can actually live off any dividend, but I guess that you can consider it as a sort of payment of monthly dividends (like Reality Income REIT does!! π ), in that case NAV goes down, you get the cash. I’ll wait to see the new post on the accounts!
ciao ciao
Stal

8. auroratwist says:

“So on the 4th January I had 2150.118 + 1.5923 = 2151.7051 Units.”
It should be 2151.7103 Units

1. Oops my bad. Actually in reviewing my data, I realized that I wasn’t handling distributions correctly since they don’t reduce the number of units. I’ve updated that section because the cash I withdrew was a distribution and already covered by the change in net asset value.
Thanks for spotting the original error!
Best wishes,
-DL

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