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