On your monthly investment statements, you may notice a column titled “book value”, and another titled “market value”. It may seem straightforward to compare the difference between these two columns and assume that is your gain or loss on the investment. However, this is not the case.
The book value is calculated by taking your original investment plus any reinvested distributions. This means that if your mutual fund pays a monthly distribution in units (rather than in cash), your book value will increase by the distribution amount each time. Therefore, your book value will increase, even though you are not actually adding any more money to the investment.
When is book value useful?
Book value is used soley to determine your capital gain or loss for income tax purposes. It is not useful in determining your rate of return on the investment.
How can you tell how much you’ve made, if you can’t use book value?
You can look at the “amount (or net) invested” on your statements in order to calculate how much you’ve made or lost. This number will exclude any reinvested distributions but will take into account any additional contributions or withdrawals from the investment.
Want an example?
Say you invested $40,000 on July 10, 2015 in ABC mutual fund. You received three years of distributions, totalling $11,000, which were all reinvested into ABC mutual fund. The current market value is $51,880.
The book value would be ($40,000+$11,000) $51,000.
If you calculated return using the book value (incorrect), it would show as:
(Market Value-Book Value)/Book Value = ($51,880-$51,000)/$51,000 = 1.73% return
If you calculated return using the amount or net invested (correct), it would show as:
(Market Value-Amount invested)/Amount Invested = ($51,880-40,000)/$40,000 = 29.7%
Information shown on monthly statements can be confusing. If you have any questions about statements or performance, feel free to reach out and let us know.