The people who visit this space are nothing if not inquisitive about mutual funds. Here is what those inquiring minds want to know after reading some of my recent work:

Q: I just finished my taxes for 2005, and I owed money because one fund had a big distribution. I don't get it. Wasatch Small-Cap Growth (WAAEX) was up about 5% for the year, but it looks like it paid out about 10% of my total holdings (which I rolled back into the fund). Could that be right? Ellen in Durango, Colo.

Click here to visit FOXBusiness.com's Mutual Fund page.

Answer: Yes, but at least this a good problem that stems from your fund actually making money.

By law, funds must distribute virtually all capital gains and income they realize from holding and trading stocks and bonds. When a fund sells a stock and locks in a profit, the gain — minus any losses that offset it — gets passed to shareholders. If the fund is in a taxable account, you owe Uncle Sam for your share, even if you rolled it back into the fund without receiving any cash.

Many funds racked up big losses during the bear market, allowing them to minimize distributions over the last few years, but gains are creeping up now that most losses have been exhausted.

At least the fund was up for the year; in 2001 and 2002, investors routinely faced big tax bills on funds that lost money (management cashed out old positions, recognizing long-term profits).

Unless Congress changes the rules — which is at least a few years off — pay attention to the "tax efficiency" of any fund that you'll hold in a taxable account. (Lipper Inc. makes tax efficiency one of its primary grades for a fund.) Fast-growth funds with a history of big payouts work best in retirement accounts.

Q: I'm not happy with the performance of [two funds] sold to me by my broker six months ago. He says I should stick with them. What do you say? Hank in Shawnee Mission, Kan.

A: I removed the names of the funds because they're ordinary, lackluster funds and I don't want the lesson lost by naming names.

There are two key points to consider here:

Six months is not very long, and while the funds haven't returned huge dollars, they haven't been monster losers either. Revisit why you bought them and how long you expected to hold them; make sure the most recent six-month period is not out-of-character for the funds, and re-examine your reasons for making the purchase in the first place. If the fund still meets your criteria, you might want to hang in there. Decide if you have completely lost faith in the funds. If you have, your confidence in the adviser may falter soon too. Express that concern to the adviser; if he or she doesn't recognize that the funds are a bad fit for your personality, that's a problem.

Q: You made good points writing about lists of the 100 best funds and the need for them to be concise. I must have missed your list. If you don't have one, why not? Eric (no city given)

A: I won't pick a list of the "best funds" for several reasons, most notably because I don't really believe that one size fits all.

The "best fund" in any category changes based on individual circumstances, so that it might be one fund if you are buying direct, and another if you invest through a financial adviser. As already noted, some funds are best suited for retirement accounts. Factor in personal risk tolerances and preferences — plus the individual investor's needs and the way a fund meshes with the countless possibilities of the funds they already own — and you've got an infinite number of possibilities.

That's why I like the research of firms like Morningstar, Lipper and Value Line, which rate the funds in various ways, allowing investors to come up with their own list based on those personal needs.

My problem isn't with lists, because a list of funds can be a terrific starting point and tool; instead, I take issue with fund lists that come attached to headlines like "100 Funds to Buy Now." Most investors need just a few mutual funds, carefully picked, watched and managed over time.

Click here to visit FOXBusiness.com's Mutual Fund page.

Too many investors have portfolios bloated with yesterday's winners — culled from these lists — and are in the awkward position of having lost some confidence in the funds, while still believing the fund must be good.

Copyright (c) 2006 MarketWatch, Inc.