Taxing Issues Associated with Mutual Fund Investing

Many investors are familiar with and invest in mutual funds. These pooled investment funds are used by many investors because they have a number of positive features, including professional management and wide diversification. Over 44% of U.S. households invest in mutual funds, held in both qualified and non-qualified accounts. In fact, almost one-quarter of  U.S. corporate equities are held in mutual funds.

One may wonder, are there any downsides to mutual fund investing? The short answer is “yes”.  Let’s investigate some of the potential tax shortcomings associated with these types of investments. If after this short review you have additional concerns, contact a financial firm Somerville NJ.

Tax Problems Associated With Mutual Funds

By law, mutual funds must pass on to their shareholders any capital gains and dividends realized during the year. If you hold your mutual funds in a non-qualified account (i.e. not an IRA or 401-K) then you will owe taxes on these pass-through profits every year. You will have to account for these distributions at tax time.

For this reason, many investors preferentially keep high-turnover mutual funds with histories of large yearly capital gain distributions in their qualified accounts.

Other “hidden taxes” associated with mutual funds are the fees that the fund companies charge. These annual fees are termed termed “expense ratios” in industry jargon. These can vary from near zero to up to 2 % or more in some cases.

Even worse are those funds that charge their customers a “Load.” Most of today’s mutual funds are no-load funds. Some firms, however, actually pilfer a percentage of your investment just for the opportunity to invest with them. “Load Funds” should be avoided in almost all cases.


Mutual funds are useful investment vehicles but they are not without pitfalls. Taxes, loads and fees can erode your profits. This is especially true if you keep your mutual funds in non-qualified accounts.