Mutual Fund Tax Bills Are Climbing

Contributed by mm | January 29, 2007 10:28 PM PST

It shouldn't be a surprise to mutual fund investors that after a few years of steady returns, mutual funds are returning more money to investors as capital gain distributions. How should smart investors respond? Stay with those funds with low turnover and long-term perspective.

From Morningstar:

April figures to be a cruel month for fund investors.

Fund investors' tax bills are on the rise for the fourth year running. The average capital gains distribution for U.S. equity funds in 2006 rose to 4.17% of assets compared with 3.32% in 2005 and 1.67% in 2004. For international equity, the average distribution was 4.98%, for balanced funds 1.95%, and for taxable bond funds 0.12%.

The cause of those payouts is of course a good thing. It means funds have produced solid returns for a few years running. Although returns were pretty good in 2003 and 2004, the distributions were small because capital gains were offset by realized losses during the early-2000s bear market. However, most of those losses are long gone.

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