Avery owns a mutual fund with a NAV of $38.00 per share and expenses of $1.50 pe

Question

Avery owns a mutual fund with a NAV of $38.00 per share and expenses of $1.50 per share. What is the expense ratio for Avery's mutual fund?

Jo purchased 375 shares of a no-load stock mutual fund. During the year she received $3 per share in dividend distributions. What are the tax consequences on the dividends after the first year?

What are the tax consequences of Jo's ownership of this stock fund earning $460 in long-term capital gain distributions?

What are the tax consequences of Jo's ownership of this stock fund after owning it for only eight months and earning $2,300 when she sold the stock? [Jo is in a 33 percent marginal tax bracket.]

Explanation / Answer

Expenses = $ 1.50 per share

Current NAV = $ 38

Expense Ratio = Expenses per share / NAV = $ 1.50 /$ 38 = 0.0394736 or 3.95% (rounded off)

Dividend received = $ 3

Number of shares held = 375

Amount of Dividend received after first year = 375 * $ 3 = $ 1125

Dividends of the Mutual fund are taxed at 15% for investors in tax bracket above 25%

Tax on Dividends received = $ 1125 * 15% = $ 168.75

Long term capital gains distribution received = $ 460

Long term capital gains are taxed at 15%

Tax on long term capital gains = $ 460 * 15% = $ 69

Gain from sale of holdings after 8 months from the date of purchase = $ 2300

Any gains from sale of stock holdings in less than a year form the date of purchase constitute short term transaction. Any gain from such short term transaction is termed as short term gains. Short term gains are taxed at the applicable tax rate of the investor.

In this case the investor will be taxed at 33% which is his current tax bracket

Tax on short term gains = $2300 * 33% = $ 759

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