Don’t invest in mutual funds just before a capital gains distribution, which usually occurs near year-end. If you do, you’ll get a partial return of capital, along with a tax bill.
Suppose that a mutual fund makes a $2-per-share capital gains distribution in December. You’ll get $2 per share while the fund’s net asset value and trading price drops by $2 per share. That $2 per share will be taxable income to you, even if you invested the day before the distribution.
You’d be better off waiting until after the distribution to buy the fund. Then you’ll pay a lower price and avoid the tax bill. Therefore, check with any mutual fund before you buy to find out the “record date” of the distribution, then buy afterwards.
