Wealth Strategy Insights

Wealth Strategy Insights: Understanding Mutual Fund Capital Gains Distributions

9 December 2020

Every year, mutual funds are required to distribute realized net capital gains to their shareholders. This event can trigger corresponding tax consequences as well as changes to underlying share values, which investors should understand.

What are mutual fund capital gains distributions?

Mutual funds are investment vehicles, whereby the trading activity during the year is accounted for within a single investment pool. Part of a mutual fund’s total return includes dividends, income/yield from bonds and net capital gains.

With regard to capital gains, mutual funds are required, annually, to distribute nearly all of their realized net capital gains (profits) on securities sold within the fund. This usually occurs in December. Unless these capital gains are marked for reinvestment, then a shareholder (i.e., investor) will receive a cash distribution. The distribution will reduce the fund’s price or NAV (Net Asset Value) by the corresponding amount.

What to expect when mutual fund capital gains are distributed to you?

Cash proceeds, classified as either a short-term or long-term capital gain, are added to your brokerage account as cash (usually within a money market fund), unless marked for reinvestment. Either way, they are reported on your 1099 tax form.

The price or NAV of the mutual fund will typically decline in an amount proportionate to the capital gain (or income) distributed to shareholders. 

A note regarding your individual net gain or loss.

While a mutual fund may distribute a capital gain for the portfolio, you also have your own cost basis in the fund based on your purchase date(s) and price (s). As such, if a capital gain distribution is received in cash (or income for bond funds), then your market value may be less once the distribution is made.

This does not mean that your actual market value declined. It means that your total return should consider all non-reinvested distributions. That is, the total return for any security must consider the current market value (reflected by the NAV multiplied by the number of shares owned) AND capital gain and income distributions received. 

As always, should you have any questions feel free to contact any member of your Calamos Wealth Management advisory team.

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Calamos Wealth Management LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Calamos Wealth Management LLC.    Calamos Wealth Management and its representatives do not provide accounting, tax or legal advice. Each individual’s tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.  Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. For more information about federal and state taxes, please consult the Internal Revenue Service and the appropriate state-level departments of revenue, respectively.
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