Sagging stock prices have made capital gains distributions a rarity
|Sources: Investment Company Institute, Morningstar, Strategic Insight.|
And these taxes can add up, with the average investor paying a 20% tax rate on capital gains. For instance, if you owned 1,000 shares of a fund selling at $10 a share -- a $10,000 investment -- and the fund paid a $1 per share capital gains distribution, you'd owe Uncle Same $200 in April if you didn't have any offsetting losses. The erosive effects of these payouts led regulators to start requiring fund companies to disclose a fund's hypothetical after-tax returns in prospectuses and shareholder reports last year. While no one likes to pay taxes, it's less painful if your fund is in the black. That mostly wasn't the case in 2000, when funds churned out record capital gains even as share values fell. The reason: Fund managers held few positions that were in the red after 1999's frothy gains. The past two years' losses have corrected the situation.