Did you see a big dip in your mutual fund values this month? This was either an actual market drop (things HAVE been bouncy lately), or not. Likely, at least one of this month’s dips was due to your mutual fund distributing capital gains and dividends. These mutual funds are really just a collection of stocks. When stock shares (held inside the fund) are sold for a profit, the funds must distribute 90 percent of realized capital gains and dividends each year. This event occurs annually in December.
If your mutual fund’s share value is $20 and it makes a $6 distribution – you will see the share price dip to $14 and you will receive a $6 cash distribution. If this happens in your taxable account you will owe taxes on these distributions. If the fund is in a tax deferred IRA or 401(k), no worries! In a year when some mutual fund share values are down for the year, this year end taxable distribution can be VERY frustrating. This sometimes happens because the mutual funds sold appreciated shares of a stock at the beginning of the year (realizing a gain), but other stock values in the fund declined later in the year. Before you get too frustrated though, remember that only stocks that have APPRECIATED will result in gains when sold. Don’t allow yourself to become so tax averse that you forget the goal is to buy stocks that gain! In this season of giving and thanksgiving remember:
“A person doesn’t know how much he has to be thankful for until he has to pay taxes on it.” ~author unknown