Mutual funds offer professional management of your money, along with diversification of investments.Mutual-fund managers pool money invested by multiple investors and use the funds to reinvest in securities such as bonds or stocks.Certain tax-exempt funds, such as municipal-bond funds, may allow you to lower your overall tax risk during the life of your investment.The IRS, and certain states, typically don't levy taxes on a portion or all of your dividends received from a municipal-bond fund.While you still may face capital-gains taxes when liquidating shares, your tax liability may be less in a low-turnover fund, due to lower gains, as compared to a high-turnover fund.If you own shares of a high-turnover mutual fund, a fund which the manager buys and sells investments frequently, you can place your shares within a tax-deferred account to reduce your tax liability on dividends.However, if your income falls within a high tax bracket, you may face alternative-minimum taxes, even with earnings from tax-exempt funds.
Typically, the IRS considers long-term capital gains as earnings from investments held for one year or more at the time you sell shares.
In addition, it may be prudent for the fund manager to set aside certain cash reserves before making final distributions to the fund owners.
This reserve could be held in the trust for any contingent liabilities as they become due.
Such assets may consist of securities that are illiquid or have certain restrictions or monies held in escrow where it will take several years for the conditions to be met for release of such funds.
The objective of a liquidating trust is to help expedite the liquidation of the entity, and allow the owners to recognize gain or loss and to receive proceeds in an orderly manner.
If you invest in mutual funds, you may face a reduction in earnings due to management fees and taxes.