| 1. If there is a broad market drop, your | | | | them in additional shares. |
| fund’s value will dip with it. The | | | | Unfortunately, sometimes you can also |
| diversification of most mutual funds | | | | owe taxes even if your fund lost money |
| protects you when one or several | | | | for the year. For the time being, |
| securities fall, but not when the whole | | | | however, this is a non-issue, if funds |
| market takes a downturn. The fact that | | | | are held in a tax-deferred account such |
| funds can fluctuate up and down, | | | | as a 401(k) or IRA. |
| sometimes wildly, is par for the course | | | | 4. Record-keeping for tax purposes can |
| and should not deter you from investing | | | | be hard work. Investors who are not |
| or scare you out of the market. | | | | meticulous about keeping track of fund |
| 2. There is no guaranteed rate of return | | | | purchases and sales may end up paying |
| with mutual funds as there is with CDs | | | | higher taxes than are actually owed at |
| and Treasury securities. Since risk is | | | | the time of sale because of a |
| higher, the liklihood of greater | | | | miscalculation of their cost basis. This |
| earnings is increased. You must also | | | | is the amount of your original deposit, |
| expect investment performance to | | | | plus additional contributions and |
| fluctuate. | | | | reinvested dividends and capital gains. |
| 3. Unwanted taxable distributions can | | | | The amount of taxes you pay will vary |
| also be a disadvantage. Funds are | | | | depending on the method you use to |
| required to pay out 98% of their | | | | calculate your gain or loss (e.g., |
| dividends, interest, and capital gains | | | | average price, first-in, first-out, or |
| annually. Taxes must be paid on these | | | | specific identification). Thus, it is |
| distributions, even if you never | | | | important to keep every annual statement |
| received them but instead reinvested | | | | for as long as you own the fund. |