This can be particularly damaging to investors holding the fund in taxable accounts, as the taxes cannot be deferred the way they could be in a tax-deferred investment, such as a 401(k) plan.
The Thrill Is Gone Liquidations often occur after a fund has dropped in value.
This forces investors who bought when the fund was more expensive to sell at a loss.
Worse yet, the fund may have embedded capital gains, which can have an immediate impact for investors holding the fund in a taxable account.
This occurs when a fund doesn't sell a stock that has risen in value since it was purchased.
For investors, this means that although the stock may have been purchased by the fund before some investors bought in, tax liability for those gains is not passed on to investors until the stock is sold and the gains are realized and paid into current shareholders' accounts.
This occurs because of the "mutual" ownership aspect of mutual funds.
Therefore, when the fund is liquidated, the investor not only sells the fund for less than the purchase price, but also still pays tax on capital gains that he or she did not get to benefit from.
Mutual fund liquidations, also referred to as "full closures," are never good news.
A liquidation involves the sale of all of a fund's assets and the distribution of the proceeds to the fund shareholders.
At best, it means shareholders are forced to sell at a time not of their choosing.
At worst, it means shareholders suffer a loss and pay capital gains taxes too.