I notice that I received dividend from a unit trust/mutual fund that I bought, and the capital I had in the unit trust was reduced by an amount similar to the dividend. Upon further investigation, I found out that this due to equalisation.

Now I understand what is equalisation and roughly on why it is needed. My questions are

  1. Do all/most unit trusts have equalisation policy?
  2. Do the companies whose stocks we owned directly apply equalisation policy on their dividends as well? Why not?

These obscure investment structures are usually not explained clearly and can falsely exaggerate the investment return.

Edit 1

I should add that I was subjected to equalisation possibly because I invested in between 2 ex-div dates, and was quite close (~3 months) to the current ex-div date. Initially I thought that funds behave in the same way as stocks regarding ex-div and dividend handouts, but I guess I am wrong.

2 Answers 2


What you are describing is a very specific case of the more general principle of how dividend payments work.

Broadly speaking, if you own common shares in a corporation, you are a part owner of that corporation; you have the right to a % of all of that corporation's assets. The value in having that right is ultimately because the corporation will pay you dividends while it operates, and perhaps a final dividend when it liquidates at the end of its life. This is why your shares have value - because they give you ownership of the business itself.

Now, assume you own 1k shares in a company with 100M shares, worth a total of $5B. You own 0.001% of the company, and each of your shares is worth $50; the total value of all your shares is $50k. Assume further that the value of the company includes $1B in cash. If the company pays out a dividend of $1B, it will now be only worth $4B. Your shares have just gone down in value by 20%! But, you have a right to 0.001% of the dividend, which equals a $10k cash payment to you. Your personal holdings are now $40k worth of shares, plus $10k in cash. Except for taxes, financial theory states that whether a corporation pays a dividend or not should not impact the value to the individual shareholder.

The difference between a regular corporation and a mutual fund, is that the mutual fund is actually a pool of various investments, and it reports a breakdown of that pool to you in a different way. If you own shares directly in a corporation, the dividends you receive are called 'dividends', even if you bought them 1 minute before the ex-dividend date. But a payment from a mutual fund can be divided between, for example, a flow through of dividends, interest, or a return of capital. If you 'looked inside' your mutual fund you when you bought it, you would see that 40% of its value comes from stock A, 20% comes from stock B, etc etc., including maybe 1% of the value coming from a pile of cash the fund owns at the time you bought your units.

In theory the mutual fund could set aside the cash it holds for current owners only, but then it would need to track everyone's cash-ownership on an individual basis, and there would be thousands of different 'unit classes' based on timing. For simplicity, the mutual fund just says "yes, when you bought $50k in units, we were 1/3 of the year towards paying out a $10k dividend. So of that $10k dividend, $3,333k of it is assumed to have been cash at the time you bought your shares. Instead of being an actual 'dividend', it is simply a return of capital."

By doing this, the mutual fund is able to pay you your owed dividend [otherwise you would still have the same number of units but no cash, meaning you would lose overall value], without forcing you to be taxed on that payment. If the mutual fund didn't do this separate reporting, you would have paid $50k to buy $46,667k of shares and $3,333k of cash, and then you would have paid tax on that cash when it was returned to you. Note that this does not "falsely exaggerate the investment return", because a return of capital is not earnings; that's why it is reported separately.

Note that a 'close-ended fund' is not a mutual fund, it is actually a single corporation. You own units in a mutual fund, giving you the rights to a proportion of all the fund's various investments. You own shares in a close-ended fund, just as you would own shares in any other corporation. The mutual fund passes along the interest, dividends, etc. from its investments on to you; the close-ended fund may pay dividends directly to its shareholders, based on its own internal dividend policy.

  • Do close-ended funds perform equalisation as well? In my experience, they behave more like stocks in handing out dividends.
    – cylim
    Apr 27, 2017 at 15:20
  • 1
    @uradium A close-ended fund is itself a publically traded corporation. Instead of owning 'units', you own 'shares'. The legal distinction between a mutual fund vs a close-ended fund is what allows a mutual fund to 'pass-through' its received dividends and interest and capital repayments to you, while a 'regular corporation' close-ended fund is limited to paying out dividends to shareholders. They behave "more like stocks" because... they are stocks. Apr 27, 2017 at 15:23

Do all/most unit trusts have equalisation policy?

It is really that some value of the fund is given to the investor, so the fund value goes down by that much per unit. It depends on the type of mutual funds. For example, there are growth type mutual funds that do not give any dividend and the total value of the fund is reflected in its price.

Do the companies whose stocks we owned directly apply equalisation policy on their dividends as well? Why not?

As far a stock price is concerned, it usually decrease by the same amount of the dividend payout at ex-date, so in effect, the market in a way does the equalization, the company directly does not do it.

  • I understand that changing the price can be used for equalisation. But for the unit trust that I own, they deduct the equalisation directly from my capital. I guess this is how the apply a separate equalisation to each customer, rather than to everyone as per equalisation with price.
    – cylim
    Apr 27, 2017 at 13:10
  • Capital? By capital do you mean the number of units held or net value of the investment?
    – Ironluca
    Apr 27, 2017 at 13:26
  • 1
    @uradium The number of units should not change in a typical return of capital. Because all mutual fund owners own a piece of the same pool of assets, returning a dividend equally based on percentage means that everyone receives the same amount of cash per unit. The number of units does not change, and your relative ownership of the total value of the fund has not changed. What has changed is the value of the fund [which no longer has as much cash, and therefore has decreased in value], and the amount of cash you own personally [because your cash has gone up by the payment]. Apr 27, 2017 at 14:59

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