mutual funds

Q&A: What’s the difference between ETFs, mutual funds and index funds?

October 12, 2021 By Liz Weston

Dear Liz: What is the difference between ETFs, mutual funds and index funds?

Answer: Index funds are a type of mutual fund. Mutual funds and ETFs both allow you to buy a diversified mix of investments, but they’re structured differently.

Mutual fund shares are usually priced once a day, based on the value of their underlying assets minus liabilities. Investors buy and sell without knowing precisely what the share price will be, since that’s calculated after they place their orders with the mutual fund company. ETFs, or exchange-traded funds, by contrast, trade throughout the day on stock exchanges and can be worth more or less than the underlying investments, depending on demand.

Most mutual funds are actively managed. That means the underlying investments may frequently change as the fund manager tries to “beat the market” and get a better return than a market index or benchmark such as the Standard & Poor’s 500. All that trading increases a fund’s costs and usually doesn’t result in a higher return.

By contrast, index mutual funds just try to match the market benchmark. This is known as passive management. Less trading leads to lower costs and typically better returns.

Most ETFs are passively managed and have even lower costs than typical index mutual funds. ETFs are the investment of choice for robo-advisors, which offer automated investment management, but they also can be an inexpensive way for individuals to invest. Also, ETFs don’t have the investment minimums that can sometimes be a barrier to start investment with mutual funds.

Thursday’s need-to-know money news

May 23, 2019 By Liz Weston

Today’s top story: Getting real about health costs in retirement. Also in the news: Watch your credit card rewards pile up with these 5 tips, learning the different types of mutual funds, and how hackers can steal your data at airports.

Let’s Get Real About Health Costs in Retirement
Making costs easier to predict.

Watch your credit card rewards pile up with these 5 tips

What Are the Different Types of Mutual Funds?
Learn the basics.

How Hackers Can Steal Your Data at Airports
Protecting more than just your luggage.

Q&A: Capital gains tax on mutual funds

February 15, 2016 By Liz Weston

Dear Liz: My mother, who is approaching 100 and in good health, has a significant mutual fund holding. It is mostly made up of capital gains. She does not need this fund for her daily living expenses. The question she has: Are the taxes on disposition the same before or after she dies? I am thinking of things like the capital gains tax exemption (never used) as well as inheritance taxes.

Answer: The capital gains tax exemption applies to the sale of a primary residence — a home, not a mutual fund. If your mother sold the fund today, she would owe capital gains tax on the difference between the sale price and her “cost basis.” Her cost basis is what she paid for the fund originally plus any reinvested dividends. The top federal capital gains tax rate is 20%, although most taxpayers pay a 15% rate.

If her objective is to get the maximum amount to her heirs and minimize the tax bill, she should bequeath this investment to them at her death. Then the mutual fund will get a “step up” in tax basis to the current market value. When the heirs sell the investment, they’ll only owe taxes on the appreciation that occurs after her death (if any).

You asked about inheritance taxes, but only a few states levy taxes on inheritors. Typically, it’s the estate that would pay the taxes, and only those above certain amounts. In 2016, the federal estate taxes exemption is $5.45 million

Q&A: Calculating capital gains and losses

November 23, 2015 By Liz Weston

Dear Liz: With my father’s recent passing, I received a substantial inheritance, much of it in the form of stocks and mutual funds. If I sell these assets, do I calculate the capital gains and losses based on the date I took possession of the assets? Or do I use their value on the date of his death?

Answer: Typically you’d use the date of his death. If your father’s estate was very large and owed estate taxes, however, the executor may have chosen an alternative valuation date six months from the date of death. This option is available if the value of the estate would have been lower on the later date.

There is a circumstance in which your basis would be the value on the date the assets were turned over to you, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting U.S. If the executor elected the alternate valuation date, but the assets were actually distributed to you before that date, then the basis is the fair market value on the date of distribution, Luscombe said.

Inherited assets usually get a “step up” in basis when someone dies, so there’s no tax owed on any of the growth in those assets that occurred while the person was alive. Inheritors have to pay taxes only on the growth that occurs between the date of death (or the alternate evaluation or distribution date) and when the assets are sold.

The assets would get long-term capital gains treatment regardless of how long you’d owned them, which is another helpful tax break.

Monday’s need-to-know money news

October 20, 2014 By Liz Weston

Today’s top story: How Americans sabotage their savings. Also in the news: Ways you can make your children’s college dreams come true, the best credit cards for holiday shopping, and the multitude of ways you can get a free copy of your credit score.