Navigating Mutual Fund Distributions: When to Buy and Key Trading Guidelines

Investing in mutual funds can be a strategic way to grow your taxable account, but it's crucial to understand the intricacies involved, especially with mutual fund distributions. If you're considering buying mutual funds for your taxable account and it's halfway through November, should you wait until January to avoid being impacted by this year's distributions? This article will help you make an informed decision by addressing the key aspects of mutual fund distributions and trading guidelines.

Understanding Mutual Fund Distributions

Most mutual fund families have already published distribution estimates and dates, typically between Thanksgiving and Christmas. For example, if you plan to buy Fidelity Blue Chip Growth and it's close to the end of November, you should do your due diligence to understand the impact of the distributions. A quick google search for "Fidelity 2019 fund distribution estimates" can provide you with this information, saving you time and avoiding potential tax implications.

Impact on Capital Gains

Consider the following example: If you buy Fidelity Blue Chip Growth before December 21 and the gain is substantial at around 6 percent, you'll be looking at a 60 percent long-term capital gain. If you are in a high tax bracket and have many other capital gains for the year, this could cost you 12 percent in taxes. This is about 1 percent of your initial investment, which is a significant figure compared to a good or bad market day for a volatile fund. However, if you are in a lower tax bracket or have minimal other gains, the cost might be negligible.

Key Trading Guidelines for Mutual Funds

While buying mutual funds is straightforward, there are some unique aspects of mutual fund trading that may not be familiar to first-time investors. Here are some essential guidelines to consider:

Buying Mutual Fund Shares

Buying mutual fund shares is relatively simple. You can purchase them directly from the fund or through an authorized broker, often via an online platform. Before making a purchase, it's crucial to understand the type of fund you're investing in and the specific terms of investment. Many funds require a minimum contribution, often between $1,000 and $10,000, though not all funds impose minimums.

Understanding Net Asset Value (NAV)

Unlike exchange-traded securities, mutual fund shares are priced at the end of the trading day based on the net value of all assets in its portfolio, known as the net asset value (NAV). The market closes at 4 p.m. Eastern Time, and mutual funds typically post their current NAV by 6 p.m. If you want to buy shares, your order will be fulfilled after the day's NAV has been calculated. For example, if you invest $1,000 and want to buy shares, you can place your order at any time, but you won't know the purchase price until the day's NAV is posted. If the day's NAV is $50, your $1,000 investment will buy 20 shares.

Fractional Shares

Most mutual funds allow investors to purchase fractional shares. If the NAV is $51, for instance, your $1,000 will buy 19.6 shares. This flexibility can be beneficial for investors who want to invest smaller amounts of money.

Fees

Before investing, it's essential to look at the costs associated with your investment. Mutual funds carry annual expense ratios, which are a percentage of your investment, and other fees. Some mutual funds charge load fees, which are commission charges, while others may charge back-end load fees if you redeem your shares before a certain number of years have elapsed. Many funds also charge 12b-1 fees, which go towards marketing and advertising the fund. Some funds offer different classes of shares, such as A, B, or C, which offer different fee and expense structures.

Trade and Settlement Dates

When trading mutual funds, it's important to understand the trade and settlement dates. The date when you place your order to purchase or sell shares is called the trade date. However, the financial transaction is not finalized or settled until a number of days have elapsed. The Securities and Exchange Commission (SEC) requires mutual fund transactions to settle within two days after the trade date. For example, if you place an order to buy shares on Friday, January 2, a fund with a two-day settlement period is required to settle your order by Tuesday, January 6, as trades cannot be settled over the weekend.

Ex-Dividend and Reporting Dates

It's also crucial to be aware of ex-dividend and reporting dates. If you are investing in a mutual fund that pays dividends and want to limit your tax liability, check when shareholders are eligible for dividend payments. Any dividend distributions you receive increase your taxable income for the year, so if generating dividend income is not your primary goal, you might want to avoid buying shares in a fund that is about to issue a dividend distribution. Ex-dividend dates are typically two business days before the record date, and you'll need to monitor both to ensure you don't end up owning shares that have already received the dividend.

Understanding these key aspects of mutual fund trading can help you make informed investment decisions and avoid potential pitfalls. If you're considering buying mutual funds for your taxable account, taking the time to research distributions and follow the trading guidelines can save you money in the long run.