Wait Before Buying a Mutual Fund

Last month, I posted a list of 10 Year End Tax Strategies. Strategy number 3 said "Don’t buy any mutual funds now." The reason I wrote that is because all mutual funds are required to pay out all their capital gains before the end of the year. The distributed gains would be fully taxable to you even if you only own the fund for a short period of time and even if you reinvest. In addition, the fund drops in value by the amount of the capital gain.
I would like to expand on this with an example. Some might say that everything zeros out if you reinvest. So if you have a fund with a net asset value (NAV) of $10, and it makes a capital gains distribution of $1, the NAV drops to $9 per share, but you reinvest the $1 and you are back to $10.
However, if you figure in the tax consequences, you are much worse off. If you owned 1000 shares of the fund, your capital gains distribution would be $1000, which would be subject to short term (up to 35%) and long term capital gains tax (up to 15%). Assuming you are in a high bracket, and the distribution consists of both short and long term, you could be paying a blended tax of 25% or $250.
You would need to decide if the market risk of waiting is worth the tax consequences.

All of the above suggestions are subject to exceptions and limitations. Don’t act on any of the above until you have discussed it with your CPA or tax advisor. No tax advice or investment advice is expressed or implied.