Don't Rely on Average Cost To Assess Performance
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:
| March 31 |
$5 |
2,000 |
$10,000 |
|
| Dec 30 |
$6 |
2,000 |
$12,000 |
($1 dividend reinvest) |
| Jan 1 |
$5 |
2,400 |
$12,000 |
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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:
 An Example
Dynamic Mutual Funds has produced an excellent piece which shows an illustrative example of dividend reinvestment and its impact on share price and returns:
So how do you assess your fund's performance?
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.
Track reinvested distributions in taxable accounts
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.
See the CRA
information circular on preparing your taxes on funds. This Tax Reporting Guide from AIM Trimark also has good information.
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 its worth double checking
the numbers.
More on dividend reinvestment
The information contained on this website is for use by persons resident in Canada only.
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