What is equalisation on dividends?

How does equalisation work? 

The fund or trust collects dividends from companies it has invested in and adds these to its cash reserves, increasing the value of the fund. 

As cash reserves grow, the unit price of the fund increases. New investors who buy units between dividend dates will therefore pay a higher price. 

On the dividend payment date, all investors receive the same dividend per unit. However, the source of this payment differs based on when the units were purchased.  

This results in two groups of investors: 

• Group A: Investors who bought units before the previous ex-dividend payment date. These receive a dividend made up of the income earned by the fund. 
• Group B: Investors who bought units after the previous dividend payment date. Part of the dividend payment is the income generated since they bought the units. The other part is the equilisation payment: a partial return of the amount they paid for the units, compensating for the higher purchase price which included accumulated income. 

It’s important to note for tax purposes that an equalisation payment is considered a return on your investment and not income.