Question

What does the cost basis of a mutual fund include?

a) The initial purchase price of the mutual fund shares.
b) Any additional investments made over time.
c) Reinvestment of dividends and capital gains.
d) All of the above.

Answer 1

The cost basis of a mutual fund includes the initial purchase price of shares, additional investments, and reinvestment of dividends and capital gains, amounting to 'All of the above'. Accurate cost basis calculation is crucial for assessing gains or losses upon sale.

Step-by-step explanation:

The cost basis of a mutual fund includes a variety of financial components. These are:

• The initial purchase price of the mutual fund shares.
• Any additional investments made over time.
• Reinvestment of dividends and capital gains.

Therefore, the correct answer to what the cost basis of a mutual fund includes is d) All of the above.

When calculating the cost basis, it is essential for investors to account for all these factors accurately. This aggregation of costs establishes the true amount invested in the fund, which is necessary for determining the correct gain or loss when shares are sold.

Mutual funds can be an effective way to practice diversification, which is vital to mitigate risk, especially considering that changes in the stock price heavily depend on varying expectations about future profits.