But wait, there's even more: By the end of the year, some not-so-lucky investors will have received taxable gains from their money-losing funds. Yes, that sounds crazy. Why should you have to owe taxes on a fund that's lost half of your investment? Shouldn't your funds be sending you a gift, asking for your forgiveness?

Blame IRS rules. Unless you're investing in a tax-deferred retirement account, such as a 401(k) or an IRA, you're on the hook for the realized capital gains that may have resulted from your manager's trading earlier in the year. "Fund managers had to sell appreciated shares to raise cash for redemptions, which triggered capital-gains distributions," says Tom Roseen, senior research analyst at Lipper. "So you have insult on top of injury."

Your fund may also have held cash or bonds earlier in the year that generated dividends or interest income. For qualified dividends and long-term gains, you will typically owe taxes at a 15% rate on the distribution; interest income and short-term gains will be taxed as ordinary income, which can be as high as 35%.

Add it all up and you might have to come up with serious cash. For example, T. Rowe Price Mid Cap Growth, which is down 42.5% so far in 2008, paid out $1.99 in short- and long-term distributions in December. That worked out to 6.2% of net asset value.

Elsewhere, Vanguard Precious Metals & Mining, which lost 59%, handed out $2.27 a share in distributions, or nearly 18% of its value, while Matthews China, down 50%, paid out $5.94 a share, or 30%.

Fortunately, funds delivering such hefty tax bills are in the minority, since most fund managers were already sitting on plenty of losses, which they could use to offset realized gains.

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