View Full Version : Do mutual funds split?
10-05-2001, 10:09 AM
My 401k is invested in a mutual fund that is currently selling for several hundred dollars a share. I know stocks tend to split when the price gets up there (except Berkshire-Hathaway) so I was wondering if shares of mutual funds split when the price gets high.
10-05-2001, 10:46 AM
Not often - there's really no advantage to to doing so.
One of the reasons a stock will split is to lower the per-share purchasing price, thus allowing more people opportunities to buy the stock, but you most likely buy mutual funds in fractional shares (with a 401k, it would likely be a fixed dollar amount from your contribution divided by whatever the fund's price is), so it doesn't offer any advantages to the consumer.
Morningstar (http://www.morningstar.com) has a good Q&A on this subject (search under "Ask the Professor"), but you need to be a member to access their archives. Alternatively, a Google search yielded this (http://www.brill.com/features/lav01014.html) article.
10-05-2001, 10:58 AM
They do split occasionally. Rarely do you see the two or three for one splits common with stocks, but it happens once in a while.
Open-endd mutual funds are recquired to pay out the majority of their capital gains each year as cash.
For example, you may have an equity fund at $20.00/share. The fund has realized $10.00/worth of capital gains in a given tax year and in December it pays those gains out as cash.
On the day they do this, the price of the shares is reduced to $10.00. If you are reinvesting, as most do in a 401k, then the extra $10.00 goes to buy more shares at the $10.00 price.
While the dollar amount you have invested in the fund hasn't changed, you now have twice as many shares at half the price. This is the same effect as if you had a two for one split.
Rarely is the capital gain as large as I made in my example, but over time the capital gains have the effect of splitting the stock and keeping its price per share at a level people are comfortable with, making any perceived need for tradittional splits moot.
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