Re: Purchase/redeem Funds

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Posted by H. C, Pierce on January 11, 2007 at 23:52:51:

In Reply to: Re: Purchase/redeem Funds posted by Mark on January 11, 2007 at 20:30:09:

: : Mark: I do not understand what is happening with funds where distributions are re-invested. When the distribution is credited to my fund and converted to additional shares, the value and number of shares go up; however, the cost (the total investment in the fund) which should have risen due to the new investment of the dividend value does not show any increase. This does not seem proper.

: : Conversely, If I sell shares the number of shares decreases and the cost of the fund is decreased. This seems proper.

: : Further, there is no provision to designate the transfer location of the proceeds of a sale not the source of a cash transfer to fund a purchase.

: : Best regards, Chuck Pierce

: Hi Chuck,

: Which cost figure are you looking at? It sounds like you are looking at an "OOP" cost. This is the cost type that is graphed. The OOP cost does not increase when you have a reinvested distribution. No money came out of your pocket, so the out of pocket cost remains the same. If you were looking at your tax cost basis, this would go up in the case of a reinvested distribution.

: I didn't follow the question about designating a transfer location? If you have a default cash account assigned, the proceeds automatically go into or come out of the cash account when you record a transaction in any investment in that sub-portfolio. If you want the proceeds to go/come from somewhere else, you could manually make that entry, but there is no automated support for this.

: Thanks,
: Mark
: --
: Fund Manager - Portfolio Management Software

Mark:

First: My above paragraph: "Further, there is no provision to designate the transfer location of the proceeds of a sale not the source of a cash transfer to fund a purchase." Should have read .....sale nor the source.....

It becomes very difficult to track and balance cash flow when you cannot transfer cash into nor out of a given data file such as one holding a given fund's information. Second, at times some funds have a "cash on hand" listing or sub-account (which may be an MMA sub-account) where cash accumulates until a destination is specified by the fund owner as to where to apply this cash.

On "OOP" --- I have found no current application for "Out-Of-Pocket" accounting anymore nor the use of this acronym and the idea of it in current literature on value, growth, and allocation investing. The only critical consideration has become the IRS requirement to be able to trace source cost of specific investments when they are sold. Perhaps, a "Do you want OOP or IRS tracking of cost?" question may become in order.

Also, (Non-IRA/401/403K) "Reinvested cash distributions (div., ST, LT, Interest, etc.) are considered to be paid income received by the payee wnich are then released back to the payor for re-investment as pre-arranged automatic matched transactions thus increasing the cost basis of the investment. They are income in the current year." With this definition (H&R Block IRS advisor), since the distribution has been paid to and accepted by the payee, it would seem to become "In-Pocket"; therefore, it would seem to follow that re-investments are "Out-Of-Pocket."

The immediate problem I'm dealing with is an automatic monthly payout from one fund routed as an automatic monthly investment purchase in another fund. The transaction appears solely as a paperwork record. No IRA's nor 401/403 accounting is involved. Obviously, these funds both have the same parent fund firm.

Best regards, HCP

Replies:

• Re: Purchase/redeem Funds Mark 00:22:23 01/12/07 (0)