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Sunday, Oct 1, 2023

Hold Off On Making Those Fund Investments

Dear George: I know many mutual funds make capital gains distributions at the end of the year. So, is it a good idea to wait until after these payments to buy a fund, especially considering Y2K?

, Del, Coronado

Dear Del: Mutual fund investors always have to deal with a two-edged sword this time of the year. Thanks to the shrewd investing style of the fund manager they are eligible to receive both short and long-term capital gains; however, they also have to pay up the taxes on those profits.

It is the normal practice of most stock mutual funds to gather up all of those gains throughout the year, balance them with any losses, and make one distribution before Dec. 31. Gains on funds are paid to investors who are shareholders of record on a specific date, usually a couple of weeks before the payment date.

Here’s the problem with capital gains: Assume the fund is trading for $10 a share and the capital gains distribution on Dec. 31 will be $1 a share. On the ex-dividend date the price of the fund will be adjusted to $9 because investors after that date will not be eligible for the distribution. So, when the payment is made the value returns to $10. However, the capital gain is taxable , let’s assume it is all long-term , at a 20 percent rate. So, in reality, you only will have $9.80 left. In other words, you lost money on a profit.

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Year-Round Payouts

Some mutual funds have started to pay gains throughout the year in an effort to soften the tax liability and reduce price fluctuations. This year funds are also either speeding up their payment earlier in December or postponing them until after the first of the year. This is in response to any potential Y2K problem.

Of course, none of this really matters if you own your mutual fund in a tax-sheltered account like an IRA. All tax liabilities are deferred until the money is ultimately taken out of the account after retirement and then it will be taxed as ordinary income.

So, is it a good idea to put off any mutual fund investments for a few months? Yes, if you are investing a large lump sum of money. Go ahead and put some of the money to work now and phase the rest in over the next few months. If you are involved in a systematic program that invests money automatically each month then don’t rock the boat. Stay with your plan.

Dear George: I don’t understand why anyone would ever buy a mutual fund with a load. Doesn’t it make sense to avoid that sales charge?

, Paula, Hillcrest

Dear Paula: It has become increasingly obvious that fees and expenses eat into the long-term performance of any investment. That applies to stock, bonds, mutual funds or anything else.

However, limiting your investment horizon to just no-load mutual funds can be a mistake. Take a look at any list of the best performing funds over a five- or 10-year period of time and you are likely to see a good mix of load and no-load funds. If you ignore those funds that levy a sales charge you might miss some great investments.

I would suggest that you put on blinders when selecting a fund and find the one that best meets your objective. If it happens to be a no-load, fine. But, don’t reject a fund just because it has a load.

It is more important to look at the annual fees and expenses that are associated with the management of a fund. Those are the costs that can really erode returns. It is easy to compare those expenses by just looking at the financial data on the inside front page of the prospectus. The Securities and Exchange Commission requires that these statistics be presented in a similar manner so that investors can compare apples to apples and oranges to oranges.

The SEC also has an excellent expense comparison calculator on the Web site (www.sec.gov).

Chamberlin is the host of “Money in the Morning,” heard weekdays from 9 a.m. to noon on Ksdo.com A/M 1130. Send your letters to him to P.O. Box 1969, Carlsbad, CA 92018, or E-mail him at (george@,moneyinthemorning.com).


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