As the point guy on the Fool's Champion Funds newsletter service, I am -- as you might expect -- a huge fan of mutual funds. Not just any fund, of course. Those that I've been recommending to subscribers for nearly two years now all come outfitted with certain key competitive advantages. Foremost among them are talented and battle-tested managers, folks with long-haul track records of beating up on the market, as well as their respective peer groups.
These funds are also cheap. On average, our Champs -- which run the gamut from funds that invest in the relatively racy likes of Yahoo!
Indeed, not for nothing do the vast majority of actively managed funds wrangle with their index fund rivals and lose -- big time.
The Santa clause
Believe me, though, Championship-caliber funds do exist. Actually, you don't have to believe me. You can take a risk-free trial of our service and see for yourself. Our overall recommendations list is beating the market by more than six percentage points, and each of our model portfolios -- which come in Aggressive, Moderate, and Conservative flavors -- are beating their benchmarks, as well.
But you know what? Even when it comes to the very best funds the money management business has to offer, now may not be the best time to invest in them -- at least not if you're planning to invest through a taxable account.
Why so? Well, as with Santa Claus, fund companies typically dole out their distributions during December. That's all fine and dandy, of course, provided you've been invested in the fund long enough to enjoy its gains. Newbies, however, will simply be handed a tax bill for returns they never earned. For that reason -- among others -- in our most recent Champion Funds update, we alerted subscribers to the estimated distributions announced by the funds I've recommended thus far.
How it works
If they have them and can't offset them by prior-year losses, funds are required to distribute capital gains and dividends to their shareholders. When that occurs, a fund's net asset value (NAV) is lowered to reflect the amount of the distribution, which is essentially an outflow of assets to shareholders.
For folks who have been around long enough to see the value of their investment rise, there's no problem. The fund will simply either issue you a check in the amount of the distribution or purchase additional fund shares for you -- a practice I heartily recommend if you've done your due diligence and are confident that your fund is a Champ. Irrespective of your choice, though, the tax implications are the same: Come April 15, you'll have to pay Uncle Sam his share of the proceeds.
(This just in from the Department of Friendly Reminders: Investors whose funds issue distributions should remember to update their portfolios to account for the payout. Otherwise, it'll appear as though their investment has fallen off a cliff, when nothing of the sort has happened. We now return to your regularly scheduled commentary.)
New kids on the block
For folks who buy when a distribution is just around the corner, however, it's a different story. These folks haven't seen their NAVs rise like old-timers in the fund, and yet they'll take the tax hit. For these folks, I recommend checking in with the company behind the fund they're considering and finding out if a distribution is on deck. If so, sit tight and wait until the dust has settled before taking the plunge. (How's that for mixed metaphors?)
In the meantime, while you're sitting and waiting, why not give Champion Funds a risk-free whirl and see what you think? At the risk of seeming immodest, I think a subscription to the newsletter -- which comes complete with access to our back issues, recommendations list, model portfolios, and world-class discussion boards -- is a great way to get a jump-start on your investing game plan for 2006.
Shannon Zimmerman is the lead analyst for the Fool's Champion Funds newsletter service. He owns shares of Vanguard Total Stock Market. Amazon.com is a Motley Fool Stock Advisor recommendation. Anheuser-Busch is a Motley Fool Inside Value pick. The Fool has astrict disclosure policy.
