Blogs & Comment

Beware of fund distributions

Attention mutual-fund investors. Dont let year-end distributions trip you up … especially if you are planning to rebalance or harvest tax losses, as recommended in Investors in the headlights.
If you are increasing your allocation to equities by purchasing mutual funds, you may get hit with taxable year-end, capital-gains distributions. And they can be significant this year because many funds in once-hot sectors like emerging markets and commodities took a lot of profits earlier in this year.
The Wall Street Journal gives two examplesfrom the Oppenheimer fund family: its Developing Markets fund has capital gains of nearly 20% of net asset valuefor the first nine months of 2008; its Global Opportunities fund has capitals gains of more than 11% of net asset value.
Most mutual funds by now have projections for their year-end distributions and have either published them or will disclose the information on request. So check with the funds before buying and go with the ones planning lower distributions, ceteris paribus.
Year-end capital distributions also provide another reason for selling a loser fund for tax-loss reasons. Youll not only get a capital loss to offset capital gains but avoid the extra tax hit in December. And if you have a choice of funds to sell, pick those headed for big distributions.
You may be reluctant to sell because you regard the position as a long-term holding and fear the price will jump before you can buy back in after the 30-day waiting period (required to avoid the superficial-loss rule). In that case, you can buy a proxy such as an exchange traded fund, or switch to a similar mutual fund with no planned distributions.