As the year winds down to a close, be extra careful when making new mutual fund purchases. You could find yourself buying a fund only to immediately receive a capital gains distribution. You can avoid making this mistake by just checking a few pieces of information readily available to investors.
Your best tools are those available to you for free, the finance websites such as Morningstar, Yahoo! Finance, Google Finance, and many others. Take the time to look at the fund information for the fund you are considering to purchase and pay close attention to past capital distribution dates and estimates for distributions to come. Not all funds have these distributions, but many funds that feature small to mid-cap companies are notorious for handing out capital gains. If you see that your prospective fund does have a distribution coming, simply wait until after the ex-dividend date. After this date, the distributions were processed and the price of the fund now reflects the distribution being made.
Keep in mind, these distributions really only affect taxable accounts. Tax deferred accounts such as IRAs or 401(k)s simply defer the taxes until you take a distribution, thus any capital gains that are distributed are also deferred.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.