Newspaper article THE JOURNAL RECORD

Some Funds Make Way-Out Payouts

Newspaper article THE JOURNAL RECORD

Some Funds Make Way-Out Payouts

Article excerpt

NEW YORK -- For investors in some stock mutual funds, the final days of 1997 brought an uproar over year-end capital gains distributions.

In cases where funds made large payouts -- like the Berger 100 Fund in Denver, which made a whopping distribution equal to about one-third of its total asset value -- taxable investors face a big tax bill when they settle up with Uncle Sam for the year.

No such problem arises in cases where funds made only small or no distributions -- such as New York's Baron Funds. "As a long-term investor in businesses, not a short-term trader of stocks, Baron Funds has been tax-efficient," President Ronald Baron told his shareholders. But tax distinctions like this don't necessarily make any one fund a better investment to own than another. Without question, most people who hold fund shares in traditional taxable accounts have reason to want funds to minimize the realized gains they pass through to their investors each year. Capital-gains distributions, required by law to permit funds to avoid paying taxes themselves, stick their recipients with an income- tax obligation even if they plow the money right back into additional shares of the fund. What's more, the whole distribution is taxable, regardless of how long investors have owned their fund shares or what price they paid for them. If part of the distribution represents shorter-term gains, it may be taxed at rates of as much as 28 percent or even 31 percent. That applies even if investors have held their fund shares longer than 18 months, which entitles them to a maximum rate of 20 percent on any profit when they sell their shares. But in your concern over this issue, it is easy to exaggerate its importance and jump to unwarranted conclusions. First of all, any tax you have to pay on a distribution that you reinvest comes with a compensating, although delayed, tax benefit. While the amount of the distribution goes into the current year's taxable income, it also is added to the cost basis of your fund investment, correspondingly reducing the amount of taxable gain you will realize when you sell. …

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