Watch Out for Capital Gain Distributions in 2008
December 1, 2008
Despite widespread stock market losses in 2008, several mutual fund companies have announced that they will make capital gain distributions to shareholders in mid-December.
This is a double whammy to investors because shareholders who hold mutual funds in taxable accounts must pay taxes on those capital gain distributions even if those capital gains were reinvested in the fund. This may seem unfair when 1) you didn’t receive the money, and 2) your fund suffered a large loss for the year.
So why do mutual fund companies distribute capital gains to shareholders when the fund itself has incurred a loss for the year? There are three reasons that funds are making payouts, even though they’re up to their ears in losses:
First, emerging markets and energy funds had big gains when the year began and realized some gains along the way. Then they suffered redemptions, which means that those gains have to be spread among fewer shareholders (i.e., the shareholders who did not bail have to pay the price for those who are trying to time the market).