One of the hazards of investing in mutual funds are the capital gains taxes that can accrue to investors who didn’t actually enjoy the gains. This is a function of the mutual fund structure. Capital gains taxes are distributed to shareholders at the end of each year, whether they were in the fund at the time of the gain, or not. Managers of mutual funds try to offset gains with losses in order to minimize the capital gains taxes of shareholders. However, with a long seven year bull market, there are now fewer losses for managers to use in order to offset gains. In addition, because of capital outflows, the shareholder base of many mutual funds has shrunk. This makes the capital gains tax bite worse than normal this year, because the gains are spread among fewer fund shareholders. “Along with fee layering, this capital gains tax distribution problem is a reason we shy away from investing in mutual funds for our clients,” said Frank Beck, President of Beck Capital. To see an interview of Christine Benz of Morningstar on this tax issue for mutual fund investors, click here.