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