Is There A Best Time to Purchase a Mutual Fund?
Mutual funds are an investing tool to add diversity. However, before you purchase a mutual fund, there are things you should consider and timing is one of them.
Posted On: 6/15/2015 10:53 AM
Many investors own a mix of individual stocks and mutual funds in their portfolio. Mutual funds are an investing tool to add diversity. These funds allow an investor to own many stocks under one umbrella. According to the Investment Company Institute’s study, investors’ appetite for funds was reported at almost $16 Billion in 2014. Yes, that’s B like in Billion. However, before investing in mutual funds, there are things you should consider and timing is one of them.
Investing in Mutual Funds Serves Many Purposes
Think about the advantages of owning one fund that holds several stocks or bonds. And, the larger the fund the more likely it is to have as many as 100+ individual securities in the portfolio. The average investor probably can’t purchase that number of stocks. Let’s say you are a new investor with limited funds. Or, perhaps you are just beginning to invest for your retirement through a Roth or Traditional IRA. Most financial advisors would recommend that you own a mutual fund to create diversity and lessen your investment risk.
If you are an employee that is offered either a 401(k) or 403(b) retirement plan, chances are that mutual funds are your only option. Employees have regular deductions withheld from their paychecks and invest monthly or weekly. Funds are the biggest beneficiaries of these plans because they accept small regular payments. If you are saving for your retirement through either a 401(k) or 403(b) plan, you can design a portfolio that helps to meet your objectives.
The Bear Trap for Tax Considerations
If you invest in a fund and a capital gain is paid, you will have to report it on your taxes. I have seen instances where an investor purchased a fund and the next day the capital gain was paid. You can own the fund for one day and have to pay taxes that year on the gain.
Most mutual funds pay a capital gain. A capital gain is recognized when the stock is sold for more than the purchase price. It is called a profit. Not all funds pay gains and they don’t always pay every year. Sometimes, in a very bad market, the price of the security has gone down so much that it is more prudent to hold then to sell. When a fund does declare a capital gain, the majority reports in November or December. As an investor, however, you should be aware that a fund can pay a capital in other months. Sometimes a short-term market correction allows you an opportunity to invest in a fund without considering the future capital gain. As an investor, you should take advantage of these occasions.
If you want to invest in a certain fund and avoid paying taxes on a gain, either call the company directly or consult with your financial advisor to find out if and when a capital gain may be paid. Be informed and don’t add to your income taxes because you invested in the fund the day before.
Timing Your Purchase in Retirement Plans
Asset allocation should be of primary importance. If you are investing in a retirement plan, what we call a tax-qualified plan because there are no taxes to report until the money is withdrawn, tax considerations don’t affect you while you are saving. However, you can’t be on autopilot because the investments originally selected may no longer be appropriate. I’m not recommending that you continually change from one fund to another, long term investing still works, but evaluating the fund is important. There are two ways you might choose to determine if the mutual fund is still appropriate. First, are you only looking at the yearly performance? Markets go up and down and the longer performance is a better barometer. Does the fund have a good long term performance record? Second, know what the mutual you have invested in owns. You may have to contact the fund company, but it is extremely important. Market sectors go in and out of favor. Right now, the oil industry is out of favor. If your fund invests heavily in this sector, and you haven’t already sold it, you might want to increase your contributions. The old expression, “buy low and sell high” works. Don’t panic and exit the fund if the performance over a long period of time has been good.
Have a great week and I look forward to chatting with you again.
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