Stock funds often advertise their past performance. However, the results that are reported aren’t necessarily the same as the dollars that wind up in investors’ pockets. Those performance numbers generally are pre-tax numbers but the after-tax results can be much different.
Stock funds typically trade their portfolios, to a greater or lesser degree. Each year, the law requires a mutual fund to distribute any net capital gains to shareholders. Tax will be owed on those gains, even if the distribution is reinvested in the same fund or in another security. Thus, investors may have to pay tax on distributions they’ve never put in their pocket.
To avoid losing returns to taxes, check out a fund’s past performance. A fund that has regularly distributed substantial capital gains to shareholders, year after year, may practice heavy trading and may continue to deliver taxable gains. Before you invest, ask your broker or a fund sales representative about its distribution record.
