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Warning Against Year-End Mutual Fund Purchases

Posted By Jim On 11/29/2007 @ 7:49 am In Investing | 9 Comments

Why is it bad to buy a mutual fund at the end of the year? The primary reason for the warning against buying mutual funds near the end of the year is because mutual funds usually do their mandatory distributions at the end of the year. What’s bad about this is that you’re now forced to pay taxes on that mandatory distribution even though you didn’t earn any of the capital gains. I think an example will clear things up.

Let’s say you bought a hundred shares of Blueprint Growth Fund and the next day, the fund announced a $5 distribution. You’ve opted to reinvest distributions and so that $5 does back into the fund and the price per share didn’t change total value of your investment doesn’t change. Okay, you didn’t lose any money yet… until you do your taxes because that distribution is considered capital gains and now you’re taxed on it. (If you didn’t opt to reinvest, instead of having the same number of shares, you’d have $500 of shares less and $500 in your bank account before taxes, same result) If you had owned the shares at the beginning of the year, it’s likely that your gains would’ve been more than the distribution and you would’ve been a-okay (just business as usual). However, since you bought so late, you’re paying taxes on gains you never enjoyed… unfortunately one of the drawbacks of mutual funds.

In theory, this is just like what happens if you buy a stock right before the company announces a dividend right?

How can you avoid this? Look up or call the fund to see when the distribution date and buy it afterwards.

Why does this matter? It makes sense to avoid this if you’re near the end of the year. Otherwise, you should be buying and holding and not trying to time the market, so I wouldn’t worry too much about it otherwise. Consider this one of the minor course correction type ideas in the nice long voyage that is your personal finance life.


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