The investor may unconsciously pay taxes on the same amount of capital gains twice! This happens more frequently than most people realize, because many fund shareholders do not understand the accounting involved and fail to keep good records. This brings us to the following rules of thumb for mutual fund investors:
❑ Keep in mind that when new investors make contributions to a fund in a rising market, taxable gains are likely to be distributed to a greater number of shareholders, which can enhance after-tax returns. On the other hand, when investors sell shares in a declining market, the portfolio manager may be forced to take gains, to the detriment of the dwindling number of remaining shareholders.
❑ Consider whether specific lot identification or FIFO is worth the time and effort to achieve a potentially more desirable result than the average cost convention of accounting for gains and losses.
Four Golden Tips for Mutual Fund Investing
❑ Be sure to check when the fund's fiscal year ends and the amount of income and capital gains distributions anticipated before making an investment, so you will not end up paying taxes on a significant amount of capital gains you did not earn.❑ Keep in mind that when new investors make contributions to a fund in a rising market, taxable gains are likely to be distributed to a greater number of shareholders, which can enhance after-tax returns. On the other hand, when investors sell shares in a declining market, the portfolio manager may be forced to take gains, to the detriment of the dwindling number of remaining shareholders.
❑ Consider whether specific lot identification or FIFO is worth the time and effort to achieve a potentially more desirable result than the average cost convention of accounting for gains and losses.
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