Is it Advisable to Buy Mutual Funds in December?
In USA, it is not advisable to buy mutual funds in the December, i mean in the end of the year. Do you know Why? Well, because you will end up with paying more taxes for the Capital Gains that you have never made. Here is the Example.
Throughout the year all the long-term and short-term net capital gains are accumulated and distributed to all the shareholders. Capital gain distributions are usually made once a year – typically near the end of the calendar year in December. Here's the catch – all accumulated annual capital gains are distributed to the existing shareholders at the time of distribution, no matter how long you've been in the mutual fund – the gains are NOT prorated based on how long you've been in the fund. So even if you weren't around long enough to participate in all the profits generated throughout the year, you will have to pay taxes on whatever capital gains are distributed to you -- ugh, more taxes! Here's an example of what could happen to you if you purchase a mutual fund right before they distribute capital gains: Let's say on December 1st you invested $5,000 into a stock mutual fund that has performed extremely well during the year, but has a very high turnover rate. Throughout the year, the fund has taken a lot of profits by selling stocks and has generated short–term profits representing 20% of the value of the mutual fund. On December 15th the mutual fund distributes those profits to its existing shareholders, who in turn must pay taxes on the reported capital gains. So in this example, you would be required to pay taxes on a $1,000 gain ($5,000 x 20%). If your taxable rate is 30%, you could pay an extra $300 ($1,000 x 30%) on gains you never received. Because you invested in the mutual fund toward the end of the year, you did not participate in the appreciation of the fund's net asset value (NAV) during the year. But unfortunately, you did pay taxes on the reported capital gains. The cold hard facts are you essentially paid extra money for the mutual fund – an extra $300. Yes, maybe unfair, but that is the way mutual funds work.
What is the Best Time to Buy a Mutual Fund in USA?
Now, You will ask me that, What is the Best time to Invest in the Mutual Funds in USA? The Best time to buy mutual funds is right after they distribute the Capital Gains I mean from January onwards.
Thus, Never Buy Mutual Funds in December to avoid extra taxes on your Income. This small information can help you to save more in taxes.