mutual fund question,plz answer

why is it that if a person starts investing in a mutual fund when the fund give out the distributions,you get a BIG tax bill?sounds odd to me.when is the best time for a person to do so?

As I understand it, mutual funds are required by law to pass through almost all of their income to the shareholder. That is just part of being a mutual fund.

So, when the fund receives dividends from the stocks in its portfolio, or when the fund profits from the sale of stock in its portfolio, that income is passed through untaxed to the shareholder. The shareholder, however, must pay the tax on the income received.

This can cause a problem — especially if the shareholder has specified reinvestment of dividends and capital gains distributions from the fund. In that case, the income received by the shareholder is 'spent' to buy additional mutual fund shares. So how does the shareholder pay the the tax?

• Some people reinvest capital gains but not dividends, and hope that the dividend distribution will be enough to pay the taxes on both.
• Some people sell enough of their mutual fund shares to pay the tax.
• Some people pay the tax from income, savings, or some other source that has nothing to do with the fund itself.

Another strategy all together is to factor in the tax history of a fund when selecting a fund to buy. "Actively managed" funds tend to have more turnover [not to say 'churn'] in their portfolio. That turnover tends to generate more capital gains income, as well as more 'management' expense.
Index funds tend to have less turnover, and therefore less capital gains income to distribute.

Hope this helps. IMO, You asked a good question.
This is a classic 'gotcha' for many mutual fund investors.
That said, I don't regard this as 'odd'. Rather it is just part of the DD we all have to go through when evaluating the investment qualities of a mutual fund.

As for "when is the best time to do so?", if you are asking when the best time is to start investing in mutual funds, my answer is, "As soon as possible."
I may have misunderstood your question here. But if you are asking, "When is the best time" from a tax standpoint, my gut reaction is "irrelevant and immaterial!" If you want to minimize the tax liabilities of a mutual fund investment, the question is not "when" but "which". That is, which mutual fund will meet your investment objectives and minimize your tax obligations. In general, the sooner someone starts to invest, the better.

Nice answer by netwrangler. I would just add that most of these distributions take place in December. So if you're considering purchasing a mutual fund at the end of the year, first check to see when that fund makes it's distribution and what the estimated distribution amount will be (you should be able to find this info on the fund family's website). If the distribution is significant and, say, only 2 weeks away or something, I think it's smart to wait until after the distribution before buying. You don't want to pay taxes on a year's worth of gains that you didn't partake in.