System Needed to Track Mutual-Fund Investments

Whatever your goals and strategies, it’s hard to get far in mutual-fund investing without a good record-keeping system.

You need well-organized records just to keep a fix on how your fund investments are doing. Beyond that, inadequate records can cost you dearly in extra taxes when you sell.

One way to cope with this situation is to save every piece of paper you ever receive from a fund, hoping that the resulting pile will serve as a file.

Or you can work up a system that doesn’t take a lot of time to maintain but that provides you quickly with information and documentation when you need it.

What follows is a bare-bones outline for such a system, offered as a model with the understanding that any plan needs to be custom-tailored to an individual’s personal style.

In this system, all the paper that passes through your hands is separated into four files:

File 1. Items you need not save but want to retain purely for background information, such as fund family newsletters and other promotional literature. These go into a “miscellaneous” folder or drawer that is explicitly understood to contain no essential documents.

File 2. Items that pertain only to tracking investment performance and administrative details, starting with a current copy of the prospectus. This category also may include such things as quarterly and annual reports from the funds, independent advisory letters and any charts you keep of funds’ net asset values.

File 3. Items to include in your annual income-tax file, including Forms 1099 and other tax forms received from each fund for the year, and copies of monthly, quarterly or annual statements showing all activity in your accounts--purchases and sales of shares, distributions received, and so forth.

Other prime material for this file: Any document that affects the amount of tax you might owe on a fund distribution, such as a municipal bond fund’s state-by-state breakdown of income sources.

File 4. Items to retain for long-term tax purposes. These include confirmation statements or other documents showing the dates and amounts of all purchases of shares. Here you need to keep track not only of what you buy directly, but the purchases you make with automatic reinvestments of distributions or switches from one fund to another.

The point is to know, and be able to document, precisely how much you have paid for all your shares, so that you can accurately figure your capital gain or loss when you sell.

Another candidate for this file--material that documents any and all non-deductible contributions you make to a tax-deferred savings program such as an individual retirement account. The idea is to avoid having to pay tax on this money again when you make withdrawals from the account.

At least a few pieces of paper will fall into more than one category, requiring occasional trips to the nearest available photocopier.

In the last few years, many fund families have been expanding the record-keeping support services they offer investors, even on such long-term matters as calculating cost bases.

This can help simplify the investor’s job and be a great help in reconstructing lost records. But it doesn’t remove responsibility for good record-keeping from the investor’s shoulders.