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Following are few great questions contributed by our community members
Updated: Jun 26, 2018
What: how to make money even if market stays flat (USA specific, not sure about other countries)
How: By purchasing mutual funds
Details: In the USA, mutual funds are required to distribute their capital gains and dividends to investors. For this example, let us consider AMANX and AMAGX. I discussed on more Halal mutual funds here earlier
From their website you can see that AMANX had $2.69 distribution per share(Dec 28 2017) which are long term capital gains + qualified dividends. Both will be taxed at 15% irrespective of when you buy the mutual funds. So if you purchase them on Dec 27th or before, you will get those distributions and pay 15% tax. Let's say for sake of simplicity you bought 100 shares at $10 per share on Dec 27th, you get $2 distribution (long term capital gains + qualified dividends). You pay 100*$2*.15 = $30 total tax. But if you sell them on Jan 1st 2018, assuming the market is flat or has improved, you will now get atleast 100*$8 = $800 plus you had $200 from distributions in Dec. So you still have $1000, paid $30 in taxes for distributions. However, when you sold the mutual fund for $8 in Jan, per IRS you are now $2 negative per share. Hence per IRS you have 1000*($10-$8) = $200 short term loss. Short term loss/gains are taxed at your ordinary income rate. Hence if you are in 25% bracket, you have accumulated $200*.25 = $50 short term loss. So, you paid $30 taxes for distributions but got $50 credit for short term loss from IRS for the next year. Therefore you made $20 even if the market is flat.
This only works if
1. The market is flat or has improved
2. The mutual funds you are buying will distribute only long term capital gains + qualified dividends
3. You income tax bracket is greater than 15%
4. You sell the mutual funds within one year to realize short term gain/loss
Updated: May 13, 2018
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