Mutual fund managers may decide to sell profitable stocks during random times throughout the year based on performance, market outlook, profit-taking and other factors. If this happens, the mutual fund will distribute profits to you in the form of capital gains distributions. Any capital gains you get will be reported on IRS form 1099-DIV. Distributions of capital gains are taxed at long term capital gains tax rates no matter how long you have held shares in the mutual fund. When selling shares of mutual funds, you will have to calculate capital gains/losses on each mutual fund you sell using a particular cost basis. If you have held a mutual fund for a long period of time, you will have a specific cost basis and different holding period for each shares of the fund you owned.
How to Calculate Capital Gains Distributions
The Internal Revenue Service (IRS) allows you to use 4 different accounting methods for calculating capital gains/losses. You can elect to choose the method that is most advantageous to you; based on the condition that you will stick to this method in the following years. The four accounting methods are:

• Actual Cost basis - Specific Identification
  
• Actual Cost basis - First in, first out
  
• Average Cost basis - Single category method
  
• Average Cost basis - Double category method

Example to Calculate Cost per Share Basis
We used an Excel template to calculate a sample cost per share basis. The initial investment of $12,000 was made on March 9th, 2009 that bought 383 shares. To calculate cost per share basis, we divide:
Cost per Share Basis = Buy Price / # of Shares
Cost per Share Basis = $12,000 / 383.56 = $31.37
To calculate cost per share basis for the entire set of transactions, we total up the Buy prices, total # of shares and divide the 2 together to arrive at the average cost per share basis.

by;Hussein

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Before you head out to purchase mutual funds for your investment portfolio, you must analyze what your investment objectives are, the levels of risk you can take, your age, the # of years to your retirement, etc. Apart from these factors, you must also research the risks that an individual mutual fund contains if you put your money in to it. One of the best ways to analyze risk is to measure the performance of the mutual fund. Many times, the performance of a mutual fund depends on the manager's stock picking abilities or his methods of allocating funds to different categories of assets. Below we explore some ways of analyzing risks of mutual fund investments.
i) Portfolio Analysis
Every mutual fund has an investment objective written on its prospectus. The investment objective describes the ultimate mission statement of the mutual fund, the types of companies/assets it will invest in (whether they are large cap, mid-cap or small cap) and whether the mutual fund invests in value or growth opportunities. One way to do portfolio analysis is to dig deeper in to the sector weights of a mutual fund.
Attribution analysis breaks down the performance of a mutual fund between i) a manager's stock picking abilities versus ii) a manager's asset allocation abilities. There are 2 methods that mutual fund managers use to pick their investment portfolios:
a) Top-down approach: Manager evaluates the economic environment as a whole and picks sectors that are set to boom and perform well during those economic times. The fund manager will then pick the best companies in each of those sectors and invest capital in to their stocks.
b) Bottom-up approach: Manager ignores the macro-economic factors such as GDP, unemployment rate or the big economic indicators. Instead, the fund manager does screening for the best companies across multiple sectors by filtering for criteria such as earnings per share growth, price to earnings ratio, dividend yield, operating cash flow, return on cash flows, return on equity and more.
With attribution analysis, an investor can tell if a fund manager has picked the right or wrong sectors of the economy or has picked the right or wrong stocks in each of the sectors. For instance, a manager could pick the wrong sectors but the best stocks in each one; this would indicate the manager is skilled at picking individual stocks but not skilled at picking booming industries.

By; Hussein

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