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Unrealized gains risk?
Old 03-05-2007, 10:53 AM   #1
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Unrealized gains risk?

If a person were to invest in a fund with low turnover, but substantial unrealized gains, say, one of the Vanguard Welly funds, isn't there a substantial risk of getting whacked with a huge tax bill for paper profits from which the new investor got no gain? Do those unrealized gains just keep building up until London bridge style they all fall down and crush the fund holders with monster tax bills? I'm just asking...
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Re: Unrealized gains risk?
Old 03-05-2007, 11:18 AM   #2
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Re: Unrealized gains risk?

They're often offset with losses.

In fact, a lot of managed funds have been employing loss carryovers from the 2000-2002 debacle. Some folks that invest in those may have some funny surprises coming to them when the capital gains arent being offset anymore. A couple had some huge distributions just this year.

Makes the indexes/passive funds look even better...
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Re: Unrealized gains risk?
Old 03-05-2007, 11:43 AM   #3
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Re: Unrealized gains risk?

Ok, but, frinstance, VWENX has unrealized appreciation as a % of net asset value of 20.85%. I don't see offsetting depreciation, if that's the right term. So again, if Joe sixpack buys VWENX today what is the risk of his getting a tax bill on that 20.85% without having participated in the gravy? Does VWENX (as an example only) just go on forever or do investors holding the bag at the dissolution of the fund get stung? Asking because the Welly funds have really good press, but that unrealized gain kinda jumped out at me.
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Re: Unrealized gains risk?
Old 03-05-2007, 11:59 AM   #4
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Re: Unrealized gains risk?

Quote:
Originally Posted by calmloki
Ok, but, frinstance, VWENX has unrealized appreciation as a % of net asset value of 20.85%. I don't see offsetting depreciation, if that's the right term. So again, if Joe sixpack buys VWENX today what is the risk of his getting a tax bill on that 20.85% without having participated in the gravy? Does VWENX (as an example only) just go on forever or do investors holding the bag at the dissolution of the fund get stung? Asking because the Welly funds have really good press, but that unrealized gain kinda jumped out at me.
calmloki....... Google up mutual fund distributions and you'll get some reading material to help with this, or read the capital gain distribution section of the prospectus of any fund you own, but in the meantime.......

Funds distribute capital gains annually, usually at the end of the year. If you are a owner of record at this time, you receive the distribution which you must report on your fed income taxes. You may choose to have the distribtion reinvested or receive it in cash, but either way it is taxable. If you purchase the fund late in the year, you stand to receive cap gain dists that you paid for in the price of the shares and the general rule of thumb is to avoid mut fund purchases late in the year for this reason.

edit:

Just re-read your question and now understand more specifically what you are asking. I think the answer is that the low turnover fund would have to change strategy so that those unrealized cap gains became realized cap gains, substantially in one year. In that case, say Wellesey changing strategy and becoming a high turnover fund, you would indeed receive the cap gain distributions in the year they occurred.

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Re: Unrealized gains risk?
Old 03-05-2007, 02:25 PM   #5
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Re: Unrealized gains risk?

As youbet said.....


IF they changed and IF they sold the stock that has the gain... then yes, you would have to pay the tax on the gain even though you did not participate...

This is the same as if you bought a fund just days before it had it's distribution for the year.... you buy, get a distribtion and pay taxes EVEN IF YOU HAD A LOSS for the year...
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Re: Unrealized gains risk?
Old 03-05-2007, 05:09 PM   #6
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Re: Unrealized gains risk?

Quote:
Originally Posted by calmloki
If a person were to invest in a fund with low turnover, but substantial unrealized gains, say, one of the Vanguard Welly funds, isn't there a substantial risk of getting whacked with a huge tax bill for paper profits from which the new investor got no gain? Do those unrealized gains just keep building up until London bridge style they all fall down and crush the fund holders with monster tax bills? I'm just asking...
IMO this is a very important question. I would place the funds with gains in a tax-deferred account, and perhaps even look for funds with large unrealized losses if you want something in your taxable account.

I only have $50,000 or so in funds, but earlier when I used them more I did exactly what I suggest.

Ha
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