Judging from the traffic numbers to our How Mutual Funds Work - Capital Gains article, there are a whole lot of you out there confused by the tax implications of mutual fund ownership. And why shouldn't you be - mutual fund capital gains can be a perplexing bit of  financial folderol that unfortunately is a necessary evil of fund ownership.

About.com has a piece that does its best to clear things up, including this bit that tries to explain how a mutual fund taxable gain distribution affects the value of your fund investment:

If you didn't choose to have your capital gains distribution reinvested, you would receive a check from the fund company for the distribution amount. When you receive a check, the amount of shares you owned in the fund will not change and your account value should fall by the amount of the check (assuming no changes in the value of the portfolio investments). If you reinvest your fund distributions, the fund company will buy you more shares of the same fund at a lower price. In such a case your share total goes up but your account value remains the same because the fund price fell by the amount of the distribution.

LINK

See also:

How Mutual Funds Work - Capital Gains

Ask MAX: Did My Fund Fall 41% In One Day?

Ask MAX: Capital Gains Quickies

Image Source: Wall Street Journal

We’ve been critical of this category in the past but have been recommending some long-short funds in our Powerfund Portfolios this year, notably American Century Long-Short Equity Inv (ALHIX) which was up 7.6% for the year through yesterday. This decent return disguises a very scary patch for this fund in August during the market gyrations that sent many heavily shorted stocks up, up, and away (and many funds that short down big on certain days). This fund has closed to new investors.

We also recommended both 1st Source Monogram Long/Short (FMLSX) (up 6.34% this year) and SSGA Directional Core Equity (SDCQX) (down 3.84% this year and one of the stinkers noted in the WSJ article) as alternatives to ALHIX for Powerfund Portfolios investors...

Today Merrill Lynch (MER) announced they would be selling stock in a private placement to two big investors, Singapore based investment firm Temasek Holdings and famed fund managers Davis Selected Advisors. Davis manages – among others - $50 billion in assets Davis NY Venture Fund (NYVTX) and is one of the most famous mutual fund companies in the business. In the private stock offering, Temasek will get up to $5 billion in Merrill stock, Davis up to $1.2 billion.

The real benefit is the investment bank needs to raise capital to offset mega-billions in losses related to overly enthusiastic wheeling and dealing in the U.S. mortgage market.

Earlier this year, we cut back on our stock holdings and increased our longer-term bond stake. Since then, stocks have been hit hard (but have come back more than once), and interest rates on the ten-year government bond have fallen below 4% (down from well over 5% - the prevailing rate when we planned our last trade). Since rates have been ticking up recently based upon inflation fears, we’re not going to cut back significantly on our bonds across the portfolios quite yet, but we may do so in the coming months.