Mutual funds are an excellent way to invest in a diversified portfolio without investing too much money, but it can be a big decision to buy mutual funds. When looking at mutual funds, you may notice that they tend to go down in December. But why does this happen?
Mutual funds go down in December because capital gains from the year are typically paid out during this month. The total capital gains paid out is how much the mutual fund decreases. However, just because mutual funds decrease in December does not mean that you should purchase them in December.
This article will discuss why mutual funds decrease in December and why you should not buy mutual funds at the end of the year. Also, you will find resources at the end to help you learn more about mutual funds so that if you do decide to invest in them, you can make a smart investment.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Reasons Mutual Funds Go Down in December
Mutual funds are big asset portfolios funded by a big group of investors who put their money in the mutual fund, with a professional investor managing the portfolio. Any gains or losses in the fund are split among all the investors based on their mutual fund share.
When a mutual fund makes money from stock dividends, security price increases, or other methods, mutual fund investors will receive a payout on the gains. This payout can happen at any time, but it is common for it to happen in December. When the fund pays out gains to the investors, the mutual fund amount decreases, and since gains are typically paid in December, mutual funds typically go down in December.
However, companies can pay out gains on mutual funds any time of the year.
They usually wait until December, so any gains or losses from the year will be offset, so they do not pay out any large gains right before a loss. It is also easier to have gains paid out in December for tax purposes.
Investors receive their gains all at once right before tax season, so it is easy for them to calculate how much they owe in taxes.
Should I Buy Mutual Funds in December?
Since mutual funds go down in December, many investors think that investing in mutual funds at this time is smart. However, this is not true for a few reasons.
Year-End Taxes
You may receive the year-end profit distribution, but you will miss out on any other gains that the fund earned throughout the year. Though you did not receive these gains, you will still need to pay taxes on any gains paid out during the year, even if they were paid before you invested.
Mutual Fund Fees
Additionally, there are fees associated with buying mutual funds, which are typically higher than other types of investments. If you want to invest in a mutual fund, you need to analyze what you are gaining versus the fees and taxes you have to pay.
Capital Gains Might Not Be Worth the Cost Next Year
Remember that if you pay taxes and fees on the year you invest in, your capital gains from the next year may not make up the difference, and you will need to pay taxes on those gains. Additionally, there could be a loss the next year, and you could lose even more money.
It is important to have your initial payout in taxes and fees be low enough to make up for it with expected gains, then get more earnings soon after to make your investment worth the money.
Therefore, the low price of mutual funds in December does not mean you are getting a deal, or the funds are on sale. It just means that gains from the year have been paid out to the investors and the price difference is the total payout.
Should I Sell Mutual Funds in December?
Selling mutual funds in December is not different from selling them at any other time in the year. But, as with buying mutual funds, you may want to wait until any dividends, or other gains are paid out before you sell.
You still need to pay taxes on your capital gains, but you want to have those profits that you earned from having your money in the fund all year. However, this applies to losses too.
If you sell mutual funds, remember that you may need to pay a fee to sell. If you own a back-end-loaded mutual fund, you will have to pay any fees associated with your fund before selling.
If you have front-end loaded shares, you have already paid most of the fees involved with investing in a mutual fund, but that does not mean there will not be more.
Your cost may also involve fees if you sell your shares of a mutual fund early, which means you agreed to hold the shares for a set amount of time when you purchased them. But if you sell them early, there could be a penalty.
Remembering this is important to consider when selling mutual funds because the fees for selling early can be significant, so make sure your gains are high enough to offset any fees.
Selling mutual funds is a big decision, just like purchasing them. While the financial consequences may not be as bad as buying shares in December, there are still many factors to consider. You do not want to end up paying taxes and fees as high as you earned, so take your time when deciding if it is the right time to sell.
Learn About Mutual Funds
Since mutual funds can be expensive to invest in, you want to learn about them before investing. If you choose the wrong investment fund, your money and time will not pay off.
These books from Amazon.com will help you understand mutual funds so you can pick the right mutual funds for you:
- Mutual Funds for Dummies: If you have little to no knowledge about mutual funds, this book will show you everything you need to know about them. The book will help you make a strategy for investing in mutual funds and the common mistakes beginners make. You will also learn how to find the right mutual funds for you and which investments are good to complement your mutual fund.
- Morningstar Guide to Mutual Funds: This will help you learn how to choose mutual funds. Picking a mutual fund is not easy, so you need to know the strategies you can use to find good, active mutual funds.
- Mutual Funds for Beginners: You will learn how to get the most out of your mutual funds and how to pick a mutual fund that will bring you steady interest with this book. The language in this book is easy to understand for beginners, and it will give you a good foundation for learning about and investing in mutual funds.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
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- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
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Conclusion
Mutual funds go down in December because that is when most of them pay out profits to their investors, which decreases the fund’s amount directly.
Just because mutual funds decrease in December does not mean you should buy or sell them during this time. You may lose money due to fees, taxes, and missed gains, so you need to analyze your investment before changing anything. By reading and learning about mutual funds, you will be better prepared to find a fund that is best for you and your financial goals.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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