Why do you still invest in Mutual Funds?Submitted by CHARLES CARROLL FINANCIAL PARTNERS on September 18th, 2017
On Friday September 15th, 2017 one of my clients received an unwanted present from the Fidelity Low Priced Stock Fund.
The 31,460 shares that my client owns have been providing unwanted presents from time to time but this one is much more unwanted than those of the past.
The Fidelity Low Priced Stock fund presented the client with a $3.67 capital gain, and a $.42 dividend. The owner of this fund is in the 39.6%+ federal tax bracket. So, the $13,000 dividend will be taxed at a whopping 45%+ tax rate. They will have to write a $5,800+ check for the opportunity of receiving this dividend.
But let’s not forget the nice capital gain distribution that they also received. Here we find that they will be paying the 20% capital gain rate along with the 3.8% Obamacare tax. The full capital gain distribution to our client was valued at $115,450. This will allow the client to write an additional check to the authorities for another $27,500. All told, the gracious gift of the Fidelity Low Priced Stock Fund will create approximately $33,300 in tax.
The $128,000 in distributions represent more than half of the accumulated value that the fund has produced in the last year.
More importantly, if you reinvest these dividends and capital gains back into the fund, all you are doing is compounding your tax bills every time (sometimes twice a year) a capital gain or dividend distribution flows out of the fund.
By the way, we have not even spoken about the management fee that the fund charges of 88 basis points or the fund’s investment return. Let alone what the actual return to the client is when considering the highest tax bracket. One last thing, when you go the Fidelity website to look up the after-tax returns of the mutual fund just know that Fidelity uses a Marginal Tax Rate, not your actual tax bracket to justify their calculation of after-tax returns.
So, stop using mutual funds! There are better ways to invest with less cost than mutual funds.
What we do
Each year we strive to keep our capital gains and dividend income to a minimum for clients in high tax brackets This is accomplished using individual securities and avoiding mutual funds. These little gifts that the mutual fund industry produces continue to prove to us that our avoidance of these tax producing mutual funds allows our clients to retain their wealth rather than distribute it back to the state and federal governments.