Analyze a mutual fund’s capital gains exposure before buying shares. While funds must distribute their dividends and interest to their shareholders every year, nothing prevents them from building up long-term gains in their portfolios. So two funds that look identical may produce very different after-tax returns when they sell the shares they own.
Because of appreciation, a fund’s value may include as much as 50% in capital gains. If a fund manager sold stock, shareholders would receive their proportionate share of long-term capital gains. Another fund’s value might include only 10% unrealized capital gains and the tax bite to shareholders would be much lower. Call the fund or look for capital gains exposure in analyses prepared by Morningstar (www.morningstar.com), Lipper (www.lipperweb. corn), or other fund data providers.
You should analyze a mutual fund’s capital gains exposure before buying shares in similar funds.