Important notes regarding your average cost base on funds when dividends are re-invested:
Be careful assessing the performance of your mutual fund when dividends are re-invested. Most mutual funds pay monthly, quarterly or annual dividends. These dividends lower the unit price of your fund, but give you more units of the fund if you have chosen to re-invest (as 99% of investors do). Thus your fund may drop in price suddenly at the end of the year, and by looking at your fund's cost vs. today's price, you may conclude your fund has not appreciated, even though it has. Don't panic. See the example below:
|Dec 30||$6||2,000||$12,000||($1 dividend reinvest)|
In the example above, your average cost and current unit price are the same at $5, but your fund is up 20%. We are required to calculate cost this way for tax purposes but it can be very misleading to the average investor when trying to evaluate investment performance. Focus instead on your total plan growth to see how your investments are doing. If your fund pays dividends, you can expect your unit price to look like this over time:
Dynamic Mutual Funds has produced an excellent piece which shows an illustrative example of dividend reinvestment and its impact on share price and returns:
Take a look at the fund's returns with dividends reinvested over a specific time period here, or contact us for a free comprehensive analysis of your fund's performance over various time frames.
Don't forget that any reinvested distributions from your mutual funds held outside your RRSP or registered retirement income fund should be added to your original adjusted cost base of the mutual funds. It's easy to forget this, particularly if you're preparing your own tax returns. Keeping track of the new adjusted cost base each year will mean you will avoid a double-tax problem when you eventually sell of your mutual funds.
Where can you get the information on these reinvested distributions? Check the periodic statements you receive. The book value reflected in these statements should be your true adjusted cost base, though it's worth double checking the numbers.
ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.
By continuing through this site you acknowledge that you agree to the terms in the Legal Notices.