Many mutual fund shareholders were pleasantly surprised in April by plentiful embedded losses in their investments. Capital gains paid by mutual funds slumped in 2003 to an estimated $14 billion, the lowest level since 1990, according to a study by the Investment Company Institute. Flagging capital gain payments are the result of previous back-to-back bear market years in which funds racked up sizeable losses.
Nearly one-third of the capital gains recorded last year were paid to fund domiciled inside tax-deferred investment vehicles, such as 401(k) plans, according the report. The lengthy bear market also contributed reduced levels of capital gains payments totaling $16 billion in 2002, which dramatically trailed a record $326 billion in 2000.
The news comes as pleasant surprise at tax time for investors who are able to realize embedded losses from funds in non-qualified accounts. Stock funds collectively logged embedded losses totaling 4% of their assets, according to the report.

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