Investors have seen their mutual funds’ values plummet 35 percent, on average, over the past year, said Dave Carpenter in the Associated Press. Yet many will be getting a tax bill for distributions and dividends paid out in 2008. How is this possible? “Even though a fund’s value has declined, it may have realized capital gains over the course of the year—profits from selling specific securities in the portfolio.” In particular, many mutual funds sold off holdings in September and October, when investors pulling billions of dollars out of funds triggered “ill-timed distributions.” Even if you didn’t cash out, you’re still on the hook for taxes they incurred. “Talk about kicking investors when they’re down.”
Mutual funds that invest in foreign stocks were among the “worst offenders,” said Daren Fonda in SmartMoney. “Many of these funds soared in recent years, creating big gains that are just now being passed on to shareholders.” Oppenheimer’s Developing Markets fund paid out a whopping 36 percent of its net assets in capital gains in 2008. Most fund managers generally don’t consider the tax consequences before buying and selling securities, says Morningstar’s Christine Benz. But some fund companies, including Vanguard and Eaton Vance, do offer so-called tax-managed funds designed to keep taxes to a minimum. “Investors may want to switch if they’re getting walloped.”
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