Tis the Season For a "Double Whammy" For Mutual Fund Investors

As most investors find it gut wrenching in facing the significant losses they have incurred, could you be an investor that receives a "double whammy" this year? Imagine if you own mutual funds in a taxable account down significantly this year, only to find out next year that you have unexpected tax bill! How can that be? Here's how many mutual fund investors could be taxed on a mutual funds that have performed horrible this year.

Given the historic downturn in the financial markets and extreme volatility, this year could be one of the worst years in highlighting the inequity of the tax code for mutual fund investors. Mutual fund companies are required to pay out year-end distributions to their shareholders when they receive any profits on the investments they sold throughout the year. Given the extreme market volatility and panic by many investors demanding their money, many mutual funds sold investments that they might have owned for a long time to meet the demand of redemptions. Although these realized gains are probably not as large as a year ago, they are still gains that are passed proportionality to the shareholder regardless of whether the shareholder has a positive return this year.

What can a mutual investor do? Although you can't change the tax code or the selling that went on in a mutual fund you may be able to dampen the potential tax burden. But you have to act quickly. December is a time most mutual funds report the year-end distributions. Call your mutual fund company or don't let your sleeping, shell shocked advisor forget to alert you to your potential mutual fund distributions/ tax liability before December 31st! If in fact you are going to receive some taxable distributions from mutual funds you own, there are many simple strategies to dampen or completely offset this tax liability since many investors have losses this year. It would be horrific to have your accountant next year alert you to an additional tax liability when it could have easily been avoided.

This article DOES NOT CONSTITUTE TAX ADVICE. PLEASE CONSULT YOUR TAX ADVISOR

Mutual Funds - The Need to Know Basics

Almost everybody has the ambition to get rich without lifting a finger - that's because there's plenty of us out there that are driven by laziness and greed. We like to find ways for having our cash work for us, or apply the Law of Leverage, which is to multiply our efforts through others. A classic example of that would be an Egyptian Pharaoh having his slaves build infrastructure or gather the rice grains which he uses for sale/trade - he doesn't do anything, but gets all the work done and gets richer and richer. You're not a Pharaoh, so how do you get rich? Well one way would be putting your money in a median that can help you reach that particular financial goal.

One "vehicle" that can get you there are mutual funds, how does this work? Simple: what you do is buy mutual funds from a mutual fund company or broker. From there, the company that you've entrusted your cash with invests it into a variety of short term investments, like the following: assets, bonds, stocks and securities. What happens next, if all does go well, is you receive dividends for each of the mutual funds you've purchased, which is your share of the profit made off it. Some people (many perhaps) find the whole process scary because they have no idea what to do first or feel that it's too much risk to take.

Fear not old friend, your investment is being managed by the company's team of investment professionals - these guys know exactly what they're doing and find the best ways possible to ensure that you make money. It's like having a symbiotic relationship with them: if they do good, you do good, heck all of you do good. Usually an investment manager does the buying and selling on your behalf, making sure all goes in your favor. As the investments diversify, the risk of loss gets lower and lower, which is clearly what everybody wants. There are three types of mutual funds, the first being: equity funds - which is basically investing in common stocks.

This is considered to be very risky, but it can also mean lots of money for you. The second type are the fixed income funds, which is a lot safer due to the fact that they're basically government and corporate securities. Here you don't take that much risk, which in some cases could mean that you don't earn that much (as compared to investing in equity funds). Lastly, we have balanced mutual funds, which consists of stocks and bonds. This type of investment is the safest amongst the three stated here, but it also is the "slowest earner" of all.

The discussion of the three kinds of mutual funds brings up an old saying: "no risk, no reward" - I forgot who said it, but I do know that it does apply to the basic "operating principle" of mutual funds. Important reminder: your shares can be sold back to the broker or to another customer at your will. If your interested in getting into this game, then I suggest you do more research about the different companies you could invest in.