Never pick a fund just because it has low fees. Lots of under-performing funds have low fees.
How Funds Distribute Capital Gains and Dividends
Once a year, late October through early December for most funds, the gains and dividends that the
fund has earned are physically distributed to investors.
If you have elected not to automatically reinvest for additional shares, the fund will mail you a check.
The NAV price will fall on that day by the amount of the distribution, plus or minus any changes in
the value of the fundís portfolio on that day.
The date that this taxable distribution is done is called the record date since the money goes to
the owner of record on this day, and the following day is called the ex-dividend date (sometimes
called the re-investment date). There is also another date, the payout date that checks are
actually mailed. You can see why even many financial advisors get these terms confused.
When you buy mutual fund shares close to the record date, youíre going to owe taxes on profits that
you didnít participate in. You should avoid this extra tax bite.
You can find this date in recent mailings from the fund, at their web site, or by calling their
Paying taxes even though you lost money
This may sound strange, but you may receive a taxable distribution even though your fund lost
money. This would be from dividends, and also any short-term gains that exceed long term gains left
over after subtracting long term losses (donít you hate all this confusing tax stuff?).
In plain English Ö who do I think Iím kidding, thereís no simple way to explain this, it just
happens, okay? In the year 2000:
Apex Mid Cap lost 76% but passed on 22% in capital gains Ė investors owed taxes on $220 of
every $1,000 they had in the fund before the big loss!
UAM Sterling Partners was up less than 1%, but had a whopping 95% taxable distribution Ė
investors paid taxes on almost their entire investment, even though they didnít make any money!
Standish Small Cap Equity was down 19%, but had a 65% taxable distribution Ė investors lost
a fifth of their money, but had to pay taxes on $650 of every $1,000 they had in the fund
This is crazy, but it really happens if your fund has a high turnover in its holdings or makes
Other Stock Market Basics Topics:
Mutual Fund Advantages
- History of Mutual Funds
- Dollar Cost Averaging
- General advice about choosing a fund
- Mutual Fund Ratings
- Evaluating Mutual Fund Investment Risk
- Mutual Fund Share Classes
- Mutual Fund Fees
- The Mutual Fund Prospectus
- How important is the manager's length of experience?
- Why is the prospectus hard to understand?
- Mutual Fund Annual Report
- Comparing your fund to the competition
- Comparing funds on an after-tax basis
- Average Return on Investment
- How Not to Pick a Mutual Fund
- Cashing in Your Fund
- When to Sell Your Fund
- Mutual Funds and Asset Allocation
- When to get started with a mutual fund
- Types of Mutual Funds
- Value Stock Funds
- Growth Stock Funds
- Small and Micro-cap Stocks
- Mid Cap
- Large Cap Companies
- Income Stock Funds
- Mutual Fund Index
- Enhanced Index Funds
- Sector Mutual Funds
- Stock Market Sectors
- Defensive Stocks
- International Funds
- Real Estate Mutual Funds
- Socially Responsible Funds
- Balanced Funds
- Tax-Efficient Funds
- Bond Convertible Funds
- Junk Bond Funds
- Mixtures of stock types
- Closed End Funds
- Exchange Traded Funds (ETFís)
- Stock Picking Strategy - Picking your own stocks?
- Fund names, and what they really invest in
- How to get started
- Where can I start investing with no money?
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