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Gains may throw you for loss
Business Browser
Date published: 11/30/2008 By Bill Freehling SOME MUTUAL FUND This is the time of year when most mutual funds distribute money to their shareholders for the capital gains that the fund has realized during the year. Most mutual fund investors reinvest those distributions to buy more shares rather than use them to cover their capital gains bill. On the day the capital gains are distributed, the price of the fund will drop by that same dollar amount. Some mutual funds won't have any capital gains this year because of the stock market's terrible performance. But many funds will. Shareholders of those funds are therefore left with the distasteful likelihood that they'll be hit with a tax bill despite the fund's price dropping during the year. Part of the reason for that is some mutual funds have been forced to sell stocks this year to generate cash for spooked shareholders wanting out of the market. Many managers won't want to sell undervalued stocks that have greatly underperformed. So they may have sold stocks that have held up better, which could lead to capital gains distributions. Long-term capital gains distributions from mutual funds are treated the same as long-term capital gains on individual stocks. Short-term distributions are taxed as an ordinary dividend. Investors can do a couple of things to lessen the bite of capital gains from losing mutual funds. First, they can take capital losses on individually owned stocks to offset the long-term capital gains from mutual funds. Second, investors can check their mutual funds' Web sites to see when the gains will be distributed. Investors might consider holding off buying any new shares until the fund makes its distributions--unless you have a strong belief that the prices will rally sharply over the next few weeks. One final thing to keep in mind--this is only applicable to people who own mutual funds in taxable accounts. Mutual fund distributions don't affect tax-exempt accounts such as IRAs and 401(k)s. Fool me once Michael Mauboussin, chief investment strategist at Legg Mason Capital Management, is an insightful thinker on the market. His excellent book--"More Than You Know: Finding Financial Wisdom in Unconventional Places"--combines lessons from psychology and numerous disciplines to shed light on the markets and investors.
Date published: 11/30/2008
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