Mutual Fund Education
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Justin Kuepper Dec 31, 2015
These issues primarily affect actively managed mutual funds that experience greater volatility and fund flow changes rather than passively managed index funds. For instance, as of November 30th, the Alger Small Cap Growth Institutional Fund (ASIRX) plans to distribute a third of its assets on December 16th to shareholders. Passively managed index funds, by comparison, typically only distribute 4% to 5% of their assets on any given year to shareholders.
While distributions are unlikely to be as high as last year, when funds paid out an estimated $633 billion, the types of funds paying out distributions is a bit unusual.
With the Federal Reserve expected to hike interest rates in December, bond funds that have historically been a safe bet are expected to pay out some big distributions. The PIMCO Long-term U.S. Government Fund (PFGAX) will distribute 38.5% of its assets on December 24th, based on its net asset value on November 30th. After rising nearly 25% in 2014, the mutual fund experienced large redemptions in early 2015 amid rate hike concerns.
CapGainsValet projects that 327 funds will distribute over 10%, 34 funds will distribute over 20%, and 20 funds will distribute over 30% of their assets, as of December 6th. So far, these figures cover about 200 of the 214 funds listed in its database.
In addition, investors should never buy a fund before it makes a distribution—especially a large distribution. Distributions are based on when the fund purchased the stock and the cost basis at the time, while distributions are distributed equally among shareholders regardless of when they purchased the mutual fund. This means that an investor holding the fund for a few days pays the same taxes as an investor that has held the fund for 10 years.
Investors that insist on using a taxable account for investing in actively managed mutual funds experiencing distributions have several options, including reinvesting, taking the cash or selling the fund before the distribution. Selling may be a good idea if the capital gains on their position is worth less than the distribution in order to minimize their tax bill; however, the investor will still owe tax on the capital gains realized from selling the mutual fund.
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Mutual Fund Education