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Margin Lending and Fund Distributions

Discussion in 'Managed Funds & Index Funds' started by fourth, 23rd Oct, 2007.

  1. fourth

    fourth Member

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    23rd Oct, 2007
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    Sydney, NSW
    When you are investing in equity growth funds\shares and the unit value increases, your LVR naturally slides down. So if you borrowed up to 70% and the value of the unit increased so that your LVR is now 40%, can you 'top up' your investment?

    Secondly, I'm assuming that 'distributions' from funds are really dividends and high growth funds\shares return next to nothing as near 100% of your value increase is in the appreciation of the unit price. Is that correct?
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yes, you can "gear up" by accessing the equity in your portfolio to buy more shares/funds. It's very easy - just ask your margin lender to buy more and to fund the acquisitions from your margin account.

    Most margin lenders have a little calculator on their site (or a table) that shows how much extra you can borrow/invest based on your current LVR and maximum borrowing limits. I wouldn't suggest borrowing right up to the maximum - leave a decent buffer, especially in these volatile markets.

    Not always.

    Yes, for many funds, the distributions are primarily dividends, and carry all the benefits of such like franking credits.

    But for some funds (particularly growth funds), you will still get large distributions, but made up of realised capital gains instead.

    Other funds have a mix of both and some funds distribute very little at all (eg geared funds).

    A trading fund like NavraInvest distributes high income, but made from realised trading profits (not capital gains and not dividends).

    ... so it all depends on the funds. You want to try and take all this into consideration when choosing funds, because it can have an impact on your tax situation and your overall strategy.
     
  3. fourth

    fourth Member

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    Location:
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    Thanks heaps. I forgot about the realized capital gains from growth assets sold by the fund over the period.