Under the tax code, mutual funds must distribute any trading gains to investors each year. Many funds make capital gains distributions in November or December. If you want to buy shares in a fund near year-end, you should wait until after the "record date," when all shareholders will receive the distribution.
The next day, the fund will go "ex-dividend." The trading fund’s share price will drop, reflecting the distribution payout, and buyers will not get the distribution. If a fund makes a $3-per-share distribution, for example, the fund’s trading price will fall by $3 on the ex-dividend date.
Therefore, you’ll get a lower price if you buy on or after the ex-dividend date. You’ll also avoid a nasty tax headache. That headache will occur if you buy earlier and receive the distribution, which means you’ll owe tax on a return of your own money.
Say you buy 1,000 shares of a fund at $10. The next day, you get a $3,000 distribution, at $3 per share. You’ll owe tax on that $3,000 distribution and the fund will be trading at $7. You would have done better to wait to buy at $7 per share.
