Buying Mutual Funds At The End of The Year Risks

Buying Mutual Funds

Buying mutual funds can be a good investment for many, but care should be used about when these funds are purchased for tax reasons. Typically mutual funds will send out the year end distribution for the fund on December 31, and if you purchase the fund before the distribution is made then it can have tax consequences. This is true for both load and no load mutual funds, and the distribution is normally done on this date because the mutual fund must pay the taxes on the money otherwise. Buying mutual funds close to the end of the year may mean that you owe taxes on the gains received all year, even though you just purchased the fund.

Global mutual funds, and all other types of funds as well, can earn income from interest, capital gains, dividends, and income from foreign sources. The type of distribution income makes a difference in how it is taxed, but the fact that it is a distribution from a mutual fund does not. Buying mutual funds late in the year can increase your tax liability, sometimes by a significant amount. Interest income from any type of fund, including green mutual funds, is subject to the highest tax rate, and the taxes you owe because of any mutual fund distribution will depend on the specific income type it is classified as.

If you are thinking about buying mutual funds the best time to do this is right after the fund has sent out the year end distributions. You can verify this by calling the fund and asking when the distribution date is. This eliminates the tax risks involved when you purchase a fund and receive this distribution shortly after the purchase. No matter which mutual fund type you choose, whether it is health or natural gas mutual funds, timing your purchase by the distribution is essential to get rid of the year end risks.