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inability to easily track a fund's NAV is the least of an investor's headache when it comes to distributions. Fund distributions have tax consequences, which many times could easily overwhelm the investors come tax time, not to mention that they could significantly eat into the fund's returns. We will cover some of these tax issues under the tax considerations section.

Funds make distributions for one simple reason: taxes. According to the law if a fund does not distribute its proceeds to its shareholders, it will be liable for taxes on those proceeds. This is something all funds would like to avoid, as paying those taxes would adversely affect their returns they try so hard to keep at a maximum. By distributing the proceeds, the funds not only shift the tax burden to their shareholders, but also they preserve their returns track record, which they can boast about and therefore attract more investors into the fund. Always remember to check with a fund (through the prospectus or other means) as to when its distribution dates are. Distributions could have a considerable effect on your potential investment returns.

With many funds you have several options to deal with the distributions. You could simply have them deposited into your account, sent to you as a check, or automatically re-invested into the fund. Remember that automatic re-investment does not eliminate or diminish your tax burden, and you may also be charged a re-investment fee, in the form of a load, by the fund. Finally it should be noted that with some accounts, such as retirement accounts, profits are not subject to immediate taxes. We will touch upon this in the tax considerations section. …