When looking at an investment statement or account balance, book value is often displayed. But what does it mean and why is it reported? To answer these questions we take a closer look at book value and what it means for investors.

Book value, also known as adjusted cost base (ACB), is calculated by adding the total amount of contributions made by an investor into a mutual fund, plus reinvested fund distributions, minus any withdrawals. Book value is used from a tax perspective to determine if an investor is in a capital gain or loss position on a particular holding. In a formula, book value looks like this:

Mutual funds earn dividends and interest from their underlying investments, and may also realize capital gains or losses when securities are sold. Every year, the fund will pay out these earnings or capital gains to its unitholders which are referred to as distributions. Depending on the fund, distributions are paid on a monthly, quarterly or annual basis.

In between distribution dates the value of each unit of the fund, known as the net asset value per unit (NAV), will typically swell as income is earned by the underlying investments. When the distribution is paid, the NAV of the fund will decline by an amount equivalent to the size of the distribution. For investors who have chosen to have distributions automatically reinvested, the amount of the distribution is used to buy additional units in the fund at the lower unit price. As a result, investors who reinvest distributions will see an increase in the overall number of units, but a lower per-unit price. The key point is that the market value of their investment remains unchanged following the distribution. Book value is not impacted if a client chooses to receive distributions in cash. However, clients who reinvest distributions back into the fund will see their book value rise by the amount of the distribution.

There are two reasons for this:

• First, whether an investor takes the distribution in cash or reinvests it, they will pay tax on the distribution in the year it is paid (other than nontaxable accounts such as RRSPs). The rise in book value accounts for the fact that the investor is paying tax in the current year on a portion of their total gains.
• A second way to think about it is that when an investor reinvests distributions they are essentially making an additional contribution to their investment.

Consider Anne, who makes an initial investment of $1,000 in a mutual fund. She subsequently invests an additional $100 and has set up her account to have any distributions reinvested.

At a later date, the fund pays a $50 distribution which is reinvested in Anne’s account by purchasing additional units.

Along the way, the book value of Anne’s investment changed when she made an additional contribution ($100) and again when she reinvested the distribution ($50).

As noted previously, book value is not impacted by changes in the NAV as the markets move up and down. Since Anne has made no withdrawals, her total book value is now $1,150 ($1,000 + $100 + $50) as seen below.

To recap, book value is an important number for tax purposes as it determines if an investor is in a gain or loss position on their holding. However, when it comes to assessing performance, book value is a less useful measure and doesn’t provide an accurate representation of an investor’s total return.