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Thursday, October 25, 2007
Watching out for hefty mutual fund distribution payouts
With the year-end around the corner, mutual funds will be distributing capital gains to their shareholders over the next couple of months. As per the Wall Street Journal article, mutual funds investors need to be careful when buying or selling mutual funds over the remainder of the year as many mutual funds, including Janus,T. Rowe Price Group Inc. and Oppenheimer Funds, are expected to make big taxable distributions this year. As the international stock funds have performed quite well, they as well as value-oriented and small-cap funds are expected to make big payouts this year.

"Some fund experts predict this year's total mutual-fund distributions will be the highest ever. Despite the summer market turmoil, stocks have moved substantially higher this year, creating sizable gains in many funds. A number of funds have also exhausted their supply of losses booked during the last bear market, which they've used to offset gains in recent years."

As mutual funds sell their holdings during the year, any net profits as well as dividends are passed out to the shareholders towards the end of year. The reason for paying attention to these distributions is that even though an investor didn't buy the mutual fund until just before the distribution, he will have to pay taxes on it even if he reinvested the distributions, assuming the fund is held in a taxable account (in IRAs or other retirement accounts, this is not an issue as those accounts are tax-deferred). Of course, on the day these distributions are paid out, the net asset value of the fund drops by the same amount. Thus, the distributions basically mean that a portion of the money you just invested in the mutual fund is returned back to you, with the drawback being that you now will have to pay taxes on those distributions.

"Taxes can have a big impact on investors' returns. Over the past 10 years, the average stock fund has surrendered an annual 1.4 percentage points of returns to taxes, according to fund researcher Lipper Inc."

To avoid these distributions, investors planning to buy funds can hold off buying them until after the funds have made these capital gains distribution. Most fund companies post expected distribution payout dates on their Web sites some time in October or November. As per the WSJ article,

"Another option: Look up the fund on and find its "potential capital gains exposure" under the "tax analysis" tab. This figure is an estimate of the percentage of a fund's assets that represent gains."

For complete article, see:

Wall Street Journal: Taxable Payouts On Many Funds Are Set to Surge

For related posts, see:

Delaying taxes on mutual funds

Mutual fund year end distributions

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posted by Ruby @ 12:40 AM  
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