The world has truly become our classroom, and I figure if our students can study anywhere, well then why not an outdoor lesson?
CSC® & IFC®/CIFC® Distribution and NAVPU
I just got off the phone with one of our students. He was asking me a question about Mutual Fund Distributions and the explanation really helped him. So I figured, “Why not record a quick video for the benefit of all our students?” If you look at the video you will see the question.
All else being equal, what would happen if a Mutual Fund made a Distribution and unit holder Harris decided to reinvest the Distribution he received back into the Fund? The nuts and bolts of each answer is “How would it impact the NAVPU and the number of units Harris would own?”.
Let’s first start with the Distribution. In our Study Guide we described a Mutual Fund as a huge portfolio to which many investors contribute. But for this question, forget about that for a moment. That’s way too confusing. Let’s pretend it is 100% your own portfolio.
What would happen if you took money out of that portfolio to pay yourself a Distribution, or whatever the heck you want to call it? Obviously, the value of the portfolio would go down, right? You are taking money out. The same holds true for a Mutual Fund. When they make a Distribution, the NAVPU falls by the amount of the Distribution paid for each unit. Now with this in mind, that’s not to know that ‘Answer A’ must be the right answer because it is the only one that says the NAVPU would decrease. The next part of ‘Answer A’ is quite logical too. If Harris uses a Distribution to buy more units then he obviously receives and owns more units.
I hope you found this video lesson helpful and good luck on your upcoming exams.