Capital Stock Income Equalization

Income Equalization
DEFINITION
Income equalization is an accounting practice used by some management companies to prevent non-daily income distributions from fluctuating with changes in Capital Stock (Cap Stock) activity. Income equalization is most often used on funds where the objective is to provide investors with a return based on the fund's earned income. Income equalization is used to prevent unfair distribution of a fund’s earnings, or dilution of existing shareholder’s earnings caused by Cap Stock activity occurring between payment periods.
EFFECT OF INCOME EQUALIZATION
As a fund earns income, the amount of undistributed income rises. When it is time for a distribution to be paid out, the undistributed income is disbursed to shareholders of record.
Funds Not Using Income Equalization
If a mutual fund does not use income equalization the income distribution is the same for all shareholders of record, regardless of when the shares were purchased. In this respect, there is no benefit for shareholders whose money is consistent in the fund. Shareholders whose money is held in the fund from the beginning of the payment period could see earned income per share diluted as investors buy into the fund during the payment period. Although undistributed income is a part of a fund's assets which make up the Net Asset Value (NAV) per share, shareholders who redeem out of a fund before the end of a payment period do not receive a set portion of the undistributed income.
Funds Using Income Equalization
If a mutual fund does use income equalization, the distribution for the pay period is a stated factor in the price per share. Income equalization, therefore, applies to that portion of a purchase or redemption payment, which is allocated for undistributed earnings. As a result of this allocation, the undistributed net income per share remains constant. Investors buying into the fund just prior to ex-date will not dilute the income earned by shareholders whose money has been held in the fund for a longer period of time. Shareholders who wish to redeem out of a fund before the end of a payment period are guaranteed to receive the full income distribution for the payment period earned up to the point of redemption.