Beware of Hidden Tax Costs When Buying Mutual Funds at Year End

Investors eager to take part in the stock market's recent run-up should watch out when investing in a mutual fund that they aren't also buying into a tax liability now that 2006 has entered its final months.

A seemingly good investment could leave investors with lower-than-expected returns initially and a hefty tax bill if they fail to pay attention to the date on which a mutual fund makes payouts to shareholders.  Investors should avoid putting money into a fund before its distribution date has passed.  If you go into it before that date, you're literally purchasing yourself a tax bill.

Mutual funds, which are required to pass their capital gains onto shareholders, generally do this near the end of the year. The payouts not only leave investors facing capital-gains taxes but also reduce the value of the fund by the amount of the payout. So investors are paying for a fund whose net asset value will very soon decline.

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