Capital Gains Can Vary from Year to Year in Mutual Funds

by | May 2, 2013 | Podcasts, Financial Planning

Do you know the four ways to get distributions from a mutual fund? Tom and Brendan start off this week’s Mullooly Asset Management podcast by talking about them. The four ways include income, dividends from holdings, short term capital gains, and long term capital gains. Short term capital gains are when you have held the fund for twelve months or less, and long term capital gains are anything over a year. When Tom and Brendan talk about these distributions, they are talking about mutual funds that you own in an investment account. This does not pertain to a 401k or retirement plan because those don’t have taxes.

Another point that is covered in this week’s podcast is that capital gains can vary. Tom gives two examples that should explain how they can vary in a simple way. One example includes a scenario where an investor puts money into a mutual fund on Monday. The funds manager bought shares of IBM back in 1994, but didn’t sell them until this week. Even though the investor just put money into the mutual fund this week, they will have capital gain responsibilities for the full twenty years of IBM being in the fund. The point is that some mutual funds have large, built-in capital gains. The other example is from the perspective of the fund manager, and really ties together Tom’s point about how capital gains can vary.Capital Gains Can Vary Year to Year in Mutual Funds

A common question that investors have after hearing about how much capital gains can vary is, “What about capital losses?”. People ask this because most times an individual investor can pair up capital gains and capital losses to get a net total. However, a mutual fund will not pass through capital losses. Overall, mutual funds involved a lot of complicated book keeping, and many people in the investment industry searched for something simpler.

Tom and Brendan discuss how Exchange Traded Funds are much simpler than mutual funds. You get distributions from from ETF’s that include income and dividends just like mutual funds. The difference is that in ETF’s you get the gain or loss on the investments from when you owned them only. ETF distributions depend on when you make your investment decisions, not when the portfolio manager bought or sold anything. Shouldn’t distributions depend on when you and your financial planner decide to make a move? We sure think so.

There is a lot to learn in this week’s podcast about how capital gains can vary, mutual funds, taxes, and ETF’s so make sure to tune in!

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