capital gains distribution

Capital Gains Distribution

Distributions that are paid to an investment company's shareholders out of the capital gains of the company's investment portfolio.

Notes:

Capital gains distributions typically occur near the end of the calendar year and are taxable to the shareholder of the investment company.

This poses a problem for some mutual fund investors who purchase new mutual funds near the end of a calendar year. Because they receive a capital gains distribution, they immediately receive taxable income and face a mutual fund NAV is reduced from the distribution.

See also: Calendar Year, Capital Gain, Distribution, Mutual Fund, NAV, Shareholder

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Capital gains distribution

A distribution to the shareholders of a mutual fund out of profits from selling stocks or bonds, that is subject to capital gains taxes for the shareholders.

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capital gains distribution

Payments to investment company shareholders based on gains from securities in the firm's portfolio that have been sold. These gains are passed through to the shareholders and are taxed to the shareholders. Distributions usually occur once each year.

Case Study Capital gains distributions can produce unexpected tax problems for mutual fund shareholders, especially investors who acquire mutual fund shares following a major increase in stock values. An even greater surprise occurs when a large distribution occurs during a year of poor market performance. Mutual funds are required to distribute to their shareholders all of the net gains the funds realize through the sale of securities. Unfortunately for some investors, gains that occur during one period are realized and distributed in a subsequent period. Buy a mutual fund following a major increase in stock values and you are likely to receive distributions on gains from which you did not benefit. In 2000 Warburg Pincus Asset Management made a capital gains distribution equal to a stunning 55% of assets to the shareholders of its Warburg Pincus Japan Small Company Fund. The distribution was occasioned by a year of spectacular gains in 1999 (a return of 329%) followed by a year of poor performance with resulting shareholder redemptions that forced portfolio managers to sell stocks to raise cash. Stock sales by the fund produced capital gains that triggered the distribution by Warburg Pincus. Although mutual funds typically make distributions during the end of the calendar year, Warburg Pincus officials indicated their distribution was made early in the year to allow shareholders time to take care of any tax liability. In a similar event, in December 2000 Select Software and Computer Services Fund distributed nearly 40% of its net asset value even though the fund was down over 9% for the year. Investors who purchased shares in the fund in early 2000 received a large taxable distribution even though their shares had lost market value during the year. Woe to the investor who fails to research a mutual fund purchase.