Before You Buy That Mutual Fund, Read This.

Before you buy your next mutual fund there are some things you should know. Did you know you can have a taxable event in the fund you just bought eventhough the share price dropped?

Before you pull the trigger and purchase your next mutual fund here are some things you may not be aware of.

My mutual fund went down after I bought into it, yet there was still a taxable event for me. This can be truly baffling for most investors, and it works like this. Imagine you bought shares in Fund A in November at $20 a share, but by the end of the year the price had dropped to $18. The next thing you know, you were taxed for a capital gain you never saw. What’s going on here? This usually happens at the end of the year when managers are trying to lock in some gains and make their fund's performance look better. When they sold shares of some of their holdings that still had a nice gain, it caused a tax consequence that every owner of the mutual fund shares. The best thing to do is buy Fund A’s shares earlier in the year. If you are tempted to buy towards the end of the year, ask your broker  or call the fund directly and find 0out if the fund had done their profit taking yet. If not, wait, it will still be a good fund three weeks later.

What is my conservative fund doing owning Microsoft and Cisco Systems?

People are drawn to a particular fund for its performance in its class. If you are looking for an income fund you are likely to look more closely at the one that is outperforming the rest in its class; makes perfect sense right? Dig a little deeper. You may find that the reason it is beating the pants off the rest is due to some high flying stocks it owns. Check the prospectus to find what types of stocks are allowed to be bought, it may surprise you. If you’re not comfortable owning Microsoft (MSFT) or Cisco Systems (CSCO), then you should probably stay away from a fund that owns them. Just because it’s a conservative fund doesn’t mean it won’t own some high flyers as well. Check the prospectus, or get the Morningstar report on it.

Who was responsible for the funds five year performance, and are they still there?

We all know that past performance does not guarantee future results, but past performance is most of what you have to go on in evaluating mutual funds. If you like the returns a particular fund showed in the last five years, you need to find out what managers where present then. If the fund has the same management you have a greater chance of a repeat performance. If they have new management it’s almost like buying a new fund without a track record; buyer beware.

These are just a couple things to be aware of before pulling the trigger on a particular fund. Do your research and yes, read that dreaded prospectus. If you’re not going to read it, then request a one page report from Morningstar. They are easy to read and easy to understand. I am comfortable buying a fund just based on those reports. If you have an advisor he should be able to get one for you, otherwise go to the site and you may still be able to get a couple freebees.

Good luck and happy investing.


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