One problem with investing in mutual funds is potential tax bills. If the fund has invested well and say bought Google at $150 and then Google was at $700 (a few years ago) there is the potential tax liability of the $550 gain per share. So if funds have been successful (which is one reason you may want to invest in them) they often have had a large potential tax liability.

With an open end mutual fund the price is calculated each day based on the net asset value, which is fair but really the true value if there is a large potential tax liability is less than if there was none. So in reality you had to believe the management would outperform enough to make up for the extra taxes that would be owed.

Well, the drastic stock market decline over the last few years has turned this upside down and many mutual funds actual have tax losses that they have realized (which can be used to offset future capital gains). Say the fund had realized capital losses of $30,000,000 last year. Then if they have capital gains of $20,000,000 next year they can use the losses from last year and will not report any taxable capital gains. And the next year the first $10,000,000 in capital gains would be not table either. Business Week, had an article on this recently – Big Losers Can Be Big Tax Shelters

How does a fund have over 100% tax losses? The way I can think of is if they have a great deal of redemptions. If the fund shrinks in size from a $3 billion fund to a $300 million fund they could have a 50% realized capital loss (down to $750 million) but then another $450 million in redemptions). Now the $300 million has a $750 million capital loss or 250%.

Related: Shorting Using Inverse Funds – Lazy Portfolio Results – Does a Declining Stock Market Worry You? – Asset Allocations Make A Big Difference

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