Can somebody explain the generalities of mutual funds?

Question

I know what they are, but I don't understand how they are taxed and what happens if/when I take money out of the fund.

Answer 1

In a taxable account in the U.S. you are taxed on the dividends and capital gains distributed by the fund each year. Capital gains are generated by the fund when they buy and sell securities within the portfolio. You have to pay tax on capital gains generated by the fund each year regardless of whether you sell the fund. It is possible to have capital gains at the end of the year even though the mutual fund decreases in value. This is why mutual funds are better to hold in tax-deferred accounts like IRAs and 401ks.

When you sell the fund you will incur a gain or loss depending on whether the value of your mutual fund is more or less than when you purchased it. So if you invested $10,000 and sold it at $15,000. You would have to pay tax on the gain of $5,000.

Answer 2

They are not taxed, in the way that companies are taxed, the fund does not pay tax to the gov't because it is non-profit, this means All it's net income flows to the unit holder.

Interest that flows to the unit holder will be taxed in the unit holders hands, and the appropriate "tax Slip" will be sent at tax time.

Dividends that flow to the unit holder will be taxed in the unit holders hands , and the appropriate tax slip will be sent at tax time.

If the price of the fund is different when you sell it, from what you paid for it. The net change (after commisions for load funds) is either a capital loss or gain for tax purposes and must be calculated by the unit holder and be included on the tax return he makes out for the tax year he sold the fund.