Unless you own your mutual fund shares in
a tax-deferred or tax-free account, you owe income taxes on the
distributions from the fund, whether the money is reinvested or
paid out in cash.
Short-term capital
gains distributions on assets the fund owned for less
than a year before it sold them are taxed at your regular rate. Gains on investments the fund
owned for more than a year before selling are taxed at your lower
long-term capital gains rate.
Income from most corporate dividends is also taxed at your long-term capital gains rate. The fund will let you know which distributions qualify for the lower rate.
If a fund loses money in any year, it can
use the loss to offset future gains. Until its profits exceed
its accumulated losses, distributions aren't taxable. The fund
will provide the information you need to file an accurate tax
return.
Portfolio turnover
All actively managed open-end mutual funds
trade their underlying investments regularly. A fund's
portfolio
turnover rate, which is provided in the fund's prospectus,
reveals how much buying and selling is going on. In general, high
turnover rates result in higher trading expenses, which means
the fund needs higher returns to offset these costs.
On the other hand, the fund may have a deliberate strategy for taking profits after a certain percentage gain in an underlying investment. That would also affect the turnover rate but might represent a gain for investors.
