The Tax Perils Of Stock Funds
Your article "How much are you really earning on your mutual funds?" (Finance, Sept. 27) stops one step short of giving a true picture of the tax risks one faces buying a stock fund. If some event such as a market correction were to trigger a mass exodus of investors, funds would need to raise cash to meet the requests for redemptions by selling securities that would give the best price: securities that are selling for more than the fund originally paid--triggering a capital gain.
For those investors who stay invested in the fund, there would be two consequences: The fund is worth less, and the fundholder will have to pay taxes on gains from the sale of the securities. If one were to hold just a security and not a fund, taxes on the gain are paid when one sells the stock or bond.
In 1987, the year of the market crash, I had to pay taxes on the gains from the underlying securities sold by the fund, even though I remained in the fund and the fund was worth less than I had paid.
By being in a mutual fund, the investor needs to realize that the actions of other investors in the fund can affect one's investment.
Jerrold M. Newman
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