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Financial Q&A: Mutual fund tax planning often begins with a phone call

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Q: I own a fund that distributes capital gains and a dividend once a year in December. For planning purposes, I'd like to know how I can estimate these payouts in advance. I assume that the fund manager knows how he is doing at any point during the year. But how do I find out? Should I make any assumptions about either the gains or dividend based upon the 40 percent price drop this year?

B.N., via e-mail

A: Give your fund company a ring very soon and see whether it has yet set a year-end payout (if there is any). Distribution amounts are generally determined at the end of each mutual fund's fiscal year, according to Sam Harris, of TFS Capital LLC, the Richmond, Va.-based manager of the TFS Market Neutral Fund.

Mr. Harris says that the administrator of each mutual fund evaluates transactions that have taken place in the prior year and quantifies the realized capital gains and dividends. By law, this money must be passed out to the shareholders of the fund within the calendar year.

Most funds provide estimates of the distribution amounts shortly after the end of their fiscal year – but ahead of the actual distribution date – so that shareholders and prospective shareholders can plan. For instance, says Harris, GE funds prominently displays its estimated distribution amounts on its website.

Generally, funds that performed poorly during a fiscal year will usually have lower distribution amounts. But Harris says that this is not always the case. For instance, if a manager only sold the few positions that gained in value, but held onto the vast majority of stocks that lost value, there would be an abnormally high distribution amount.


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