If you've noticed that one or two or eight of the funds you own tumbled 10% or 20% in one day recently, don't panic. It's almost certainly due to a fat capital gains distribution. Of course, you have to pay taxes on that distribution, so keep the
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Here's what's going on. When a fund's realized gains outweigh its accumulated losses, it's required to pay those gains to shareholders. When a fund pays out the gain, its net asset value (NAV) or share price drops by the amount of the gain. So, a $10 fund that pays out $1 per share in capital gains on Monday is priced at $9 that night.
The share price of the stumbling
Janus Venture fund, for instance, dropped more than 25% when it paid out a $16.38 per share cap-gain last Friday. The
Fidelity Select Electronics fund's share price dipped 19% on the same day when its gains were accounted for.
Your account is probably set up to reinvest these gains in additional fund shares, so the big tumble could be quite a shock. That said, after last year's fat gains and this year's big losses, these taxable gains are a pretty painful double whammy.
The average investor pays a 20% tax rate on their capital gains, so if you owned 1,000 shares of a fund selling at $10 -- a $10,000 investment -- and the fund paid a $1 per-share capital gains distribution, you'd owe Uncle Sam $200 in April. Of course, you can book losses to offset these gains, but if you own several growth funds these gains can add up in a hurry.
Fund Junkie runs every Monday and Wednesday, as well as occasional dispatches. Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
email@example.com, but he cannot give specific financial advice.