A number of press reports have recently warned mutual fund investors about the problem of capital gains distributions on their fund shares. Under current law, such distributions can impose additional taxes even on investors who never sold any of their shares. George W. Bush would be wise to make relief of this problem an element of his tax package. As everyone knows, a mutual fund is a company that buys and sells corporate stock on behalf of investors in that fund. Investors can buy and sell mutual fund shares just like individual stocks, and the variety of funds available for investment is almost as great as the universe of the stocks they own.
Mutual funds are an excellent investment vehicle for small investors.
They get the benefit of professional management of their assets, they can often buy in smaller increments than would be efficient if they were buying shares directly, and they are able to diversify their portfolios very easily. Unfortunately, there is a downside to mutual funds when it comes to taxes. When investors buy corporate stock directly, no tax is paid, no matter how much the stock rises in value until they sell the shares. This gives investors the power to decide when to realize gains and losses. Often, they are able to minimize capital gains taxes by selling stocks with gains and losses in the same year, using the losses to offset the gains for tax purposes.