One of the great advantages of mutual fund ownership is the ease with which you can purchase or redeem shares. But, you shouldn’t let the simplicity of such trading detract from its significance. Transactions deserve some careful thought.
Invest with a Plan
Each fund or investment you own is part of your portfolio. A solid investment portfolio is driven by a plan that takes into consideration your investment goals, time horizons and the amount of risk you’re willing to take. These considerations all factor in to the types of investments that are right for you.
Get into the habit of viewing your investments as a whole to get a good look at your overall financial picture. You might view your retirement investments together and track their performance as a group, rather than as individual investments. Discipline is the key to any investment strategy and professional financial advice can guide you to the choices that are right for you. You and your advisor should consider your long-term investment objective and make rational decisions based on facts rather than emotions.
Know What You Own or Buy
Many investors were lulled into a false sense of security by double-digit returns from the stock market in the late 1990s. While evaluating historical performance is critical to any investment decision, it is equally important to understand what you own, buy or sell.
For example, the risk and reward potential for a value fund may be quite different than that of a technology growth fund. Look beyond the returns and examine what a fund invests in, what its strategies are and how it is managed. A good place to start is your fund’s prospectus. Always read a prospectus before you invest.
Your major concern will be capital gains-the profit you’ve earned on the sale of your shares. Appreciated shares sold a year or less after they were purchased will incur a short-term capital gain which is taxed as ordinary income. In contrast, any gain on shares held for over a year is classified as long-term and taxed at the long-term capital gains rate of 15%, which is generally lower than the ordinary income rate.
Of course, you may have incurred a loss rather than a gain. Net losses on mutual fund shares can be used either to offset gains in other areas of your portfolio or to offset ordinary income.
If you withdraw from your retirement account before age 59½, you may be subject to an early withdrawal penalty, in addition to the ordinary income taxes you’ll pay on the withdrawal. To learn about some exceptions to this rule, and find out if you qualify, consult your financial advisor or a tax specialist.
Fees and Loads
If you redeem Class B shares, you may have to pay a “back-end” sales charge. But, the longer you hold the shares, the lower the sales charge. After six years, B shares convert to A shares and the back-end sales charge disappears altogether. Before you sell, check both the fund’s fee policy (which can be found in the specific fund’s prospectus) and the length of time you’ve held the investment. You should also consult your financial advisor.
For more information on this fee and how it may affect your transaction, view the fund’s "prospectus or speak with your financial advisor.