Mutual Funds had Large Distributions in December

A friend of mine asked me for a few mutual fund recommendations for his IRA shortly after Thanksgiving. He took my recommendations and spread some of his money among those mutual funds. Last week I spoke to him and he said that he sold out of two of the funds because he noticed the share prices had dipped 10%, and the correction made him nervous. I asked him whether he had looked at the number shares owned in each of those funds and the total value of the money invested in each fund, and he hadn't. I told him that he worried for no reason and he should have called me before selling the funds. Here is why.

Mutual funds that have been successful disburse a portion of the fund for capital gains purposes in mid-December each year. In the case of a retirement fund, the gains get reinvested into the mutual fund, so one ends up with more shares of the mutual fund at a lower price. My friend was not aware of this and thought that his investment in the mutual funds that recently had distributions had actually declined rather than stayed even or even increased.

Always consult your financial advisor prior to selling a mutual fund because of a perceived loss that may not actually exist due to capital gains distributions.

So what are capital gains distributions? They are a distribution of profits from a mutual fund that result from the sale of securities in the mutual fund portfoliothat are taxed in a taxable account.