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The tax laws require a mutual fund to distribute the capital gains and ordinary
income that it receives from its portfolio investments each year. The capital
gains requirement applies only to profit that has been realized through the
sale of securities, with the gains typically distributed by funds toward the
end of the calendar year. These distributions are taxable when paid to taxable
accounts, whether the shareholder receives the distribution in cash or
reinvests it in additional fund shares.
Fund shareholders may realize capital gains in two ways. First, if the fund
manager sells stock on the shareholders' behalf inside the fund portfolio and
then distributes that gain to the shareholder as a taxable distribution; and
second, if the shareholder sells his or her mutual fund shares at a Net Asset
Value (NAV) greater than the NAV at time of purchase.
Tax Implications
Fund gains that arise from the sale of securities held by the portfolio for
more than one year are distributed to fund shareholders as "capital gain
dividends", even if the shareholder purchased fund shares less than one year
earlier. Shareholders report these dividends on their tax returns as long-term
capital gains, which are taxed either at a reduced rate of 10 percent (for
those taxpayers otherwise taxed at a 15 percent rate) or at a reduced rate of
20 percent (for those taxpayers otherwise taxed at rates above 28 percent).
Which Funds Will Generate Capital Gains?
Any type of mutual fund (other than a money market fund) can generate capital
gain distributions since distributions are generated when a fund sells
portfolio securities for a net profit over the course of a year. However, some
portfolios traditionally generate greater capital gains than others. Equity
portfolios, for instance, historically realize greater gains than bond
portfolios. And, depending on marketplace trends, certain investment styles
within the equity universe may demand increased portfolio activity, which in
turn may generate greater capital gains.
Important Dates
There are three dates that are important in the capital gains calendar. If you
are a shareholder on the record date, you will receive the capital gains
distribution. That distribution is then taken out of the fund's Net Asset Value
on the ex-date (thereby causing the fund's price to decline to reflect
that reduction in value). It is this amount taken out of the NAV on the ex-date
that is used to pay the capital gain to shareholders of record. These capital
gains are then paid out, in the form of cash or additional shares, on the payment
date.
PIMCO Funds Capital Gains
In December, PIMCO Funds will have its record, ex-, and payment dates for its
realized capital gains. It is important to remember that fund prices on the day
after the funds' ex-date will be effected by the amount taken out of the funds'
Net Asset Values (in order to pay the capital gain distribution). These amounts
are subject to change for many reasons, including market volatility, fund flows
and portfolio activity. As we have further information on capital gains
amounts, dates and reinvestment prices, we will post the data to our Web site.
Financial advisors with questions on these capital gains can call PIMCO Funds
at 1-866-746-2602.
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