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Author: SJsDad One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 27821  
Subject: Re: DRP vs. index funds? Date: 10/5/2001 4:12 PM
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Back to the orig. question, another reason to own specific stocks in a Drip is you control the date you will realise any capital gains (or capital losses). When I had more money in mutual funds, I had capital gains (long and short term) every year (even years I personally did not see any gains) even though I had taken no money out of the fund (thus I had to pay taxes on "gains" I did not have in hand). This is extremly common with mutual funds because of the constant buying and selling by the portfolio managers. Index funds, by their very nature, experence less "phantom gains" than the average fund because the managers do not do much in the way of selling - unless the market drops and lots of people pull their money out of the fund (most index funds have a lot of unrealized gains in there - you could have capital gains in a down year!). The vast majority of my drips have resulted in no taxable gains - and they won't until I sell them (if I ever do sell them - you have lots of other options with actual stocks you do not have with funds - like donating the appreciated stock to charity, etc). Basicly any advantages that purchasing individual stocks have also apply to drips, PLUS no-fee drips have the advantage of being the cheapest way to own stocks (even cheaper than index funds).

(note there will be small non-capital gains with both drips and funds, due to dividends, but given the tiny dividend yield of most stocks this is not really much of a concern - and should be about the same in either case if you are investing in similar stocks).
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