Dian's Column
Dian's Archive


Along With Fund Performances Come Tax Consequences

If performance is any guide, Wall Street doesn't seem to care much about the problems the mutual fund industry has had. A quick look through how funds fared during the month of November points out one of the reasons why investors choose mutual funds in the first place---for the money.

All but one of the 15 categories that fall under Lipperis U.S. Diversified Equity Fund heading showed positive returns last month. (Lipper tallies fund performance figures on Thursdayis each week so data is through November 28.) The losing group, speciality diversified equity funds. Under its heading fall bear market type funds and for the month, the average fund in that group was down about one-half of a percent.

On the other hand, November was particularly good for most funds. All types of small-cap funds ( small-cap core, growth- and value-type) were all up more than 7 percent. Science and technology funds were up on average nearly 6 percent; real estate funds up over 5 percent; and the average gold oriented fund moved ahead a whopping 11.6 percent.

Fixed-income funds scored in positive territory, as well, although not nearly as handsomely. The average taxable bond fund moved up 0.57 percent last month; the average general municipal bond fund, up 1.26 percent.

Look at the largest equity funds around and Fidelity's Low Priced Stock fund moved up the most in November---up 5.78 percent which brought its year-to-date total return to a plus 35.96 percent. Of the largest fixed-income funds, the Lord Abbett Bond-Debenture fund moved up 1.97 percent last month bringing its year-to-date total return to 17.40 percent.

Impressive returns for both stock and bond fund investors thus far this year. But along those returns can come tax consequences in the form of capital gain and income distributions.

Because mutual funds are required by law to distribute their realized capital gains and income to shareholders at least once a year, fund investors are faced with a capital gain distribution when the fund has sold securities held in its portfolio for a profit; the taxes due from income distributions come from the interest paid from fixed-income securities and stock dividends.

Because funds frequently make capital gain and income distributions in December, now is the season when investors holding funds in their taxable accounts start seeing them. Those with funds in qualified retirement accounts, like IRAs or 401(k)s, aren't faced with that reality until a later date.

While capital gain and income distributions are as much a part of mutual fund investing as total returns are, if youire thinking about making a new fund investment this month, you might want to put that decision off until after the fundis record date. A fundis record date is the date that establishes the investor as a 'shareholder of record' meaning that he or she is entitled to receive a fundis income or capital gain distribution. The record date is usually the business day prior to the fundis distribution date. For information about your fund investments, contact your fund family, investment advisor, or visit your fund familyis web site to learn what a fundis record and distribution dates are, as well as information about what the fundis capital gain payouts may be.

Purchasing fund shares right before the fund makes a capital gain or income distributions can be an easy way to pick up extra income, but it comes at a price--- paying taxes on those distributions. Hereis an example from The Vanguard Groupis web site about how that works: You invest $5000 in Fund X, buying 250 shares at $20 each. If the fund announces a distribution of $1 per share, its share price will drop to $19 (not counting market changes) on the reinvestment date. Youill still have $5000 (250 x $19 = $4,750, plus the $250 distribution). But now youill own tax on the $250 distribution, even if you reinvest it in more shares.

So to save yourself a few bucks come April 15, make sure to check out a fundis record date before jumping into a new fund this month.

To read more articles, please visit the column archive.

[ top ]