There could be a variety of reasons that lead to such a mutual fund tax shock, below are some of the major ones:
1. Fund Managers' Selling Activities
If during a market turmoil, a fund is down. Now some of the fund's investors decided to exit the fund, or due to whatever other reasons, the fund managers have to sell some of the fund's holdings. If some of the holdings sold actually had large gains due to the fact that they were bought long ago with low cost basis, then this fund could end up with a positive capital gain distribution despite an overall loss.
2. Change of Fund's Managers or Strategies
If due to a fund manager's retirement or whatever reason the current fund managers decided to change the fund's investment strategies, then chances are some large selling would happen which could lead to large distribution of capital gains, even though the fund's performance is actually negative.
Most mutual funds would estimate and announce their capital gain payouts around this time of year, you can check your fund's website, or visit capgainsvalet.com.
In our next blog post, we will discuss what to do if you find you have a big gain coming.