Mutual Funds Basics 2 - one more point to note

Mutual Funds Basics 2 - one additional point to take note of when dealing with US based Mutual Funds

Tax impact (in the case of the USA only; thanks to Yahoo finance)

Most mutual fund investment profits are taxed around the world, but in the USA there are a few additional considerations to take into account. If you want to make money, taking taxes and fees into consideration is a really good idea. The profits on mutual fund investments are typically subject to federal, and often, even state and local income taxes, unless you are investing through either a tax-free retirement or education account, or something like that.

While there is the joke about being certain about nothing except death and taxes, there are also many considerations here when it comes to making money with mutual funds.

With respect to your mutual funds and taxes in the USA, if you invest in a regular taxable account, then the dividend and the taxable interest distributions that you receive are taxed as ordinary income each year.

A mutual fund is required to distribute its net realized capital gains each year, and those distributions are also taxed as either short-term gains or long-term gains, depending on how long the mutual fund held the securities in question.

A mutual fund that buys and sells securities (with a trigger happy fund manager) frequently may add to your tax bill with hefty capital gains distributions.

You will also incur taxes on your capital gains, and also pay taxes depending on how long you had held the shares, if you redeem shares in a mutual fund at a price higher than you paid for them.

Please do take note of all the abovementioned points if you want to invest in mutual funds.

(source of information: Yahoo finance)