Year-End Fund Tips

Funds are the investment vehicle of choice for more than 90 million of us, in large part because of their convenience. If you want to make the most of your holdings -- and you know you do, Fool -- proper care and feeding is essential, particularly around the close of the year.

With that in mind, here are three tips that on-the-ball investors should bear in mind as 2006 begins drawing to a close.

1. Don't buy anything!
If you're investing in funds via a taxable account, right now is likely a bad time to buy into a new fund. That's because funds are required to pay capital gains and dividends to shareholders, and these "distributions," perhaps in the spirit of the holidays, typically occur around this time of the year.

Sounds good, but here's the thing: These payouts are taxable events. That's no biggie if you've been in the fund long enough to enjoy a rising net asset value (NAV): Just like stock investors do, you'll have to pay taxes on the realized gains and income, but hey, these are profits we're talking about!

If, however, you establish a position in a fund just before the payout occurs, you've essentially bought a tax bill -- and the sum can be tidy indeed.

One example: Vanguard Explorer (VEXPX) -- a closed, smaller-cap fund that counted the likes of Akamai Technologies (Nasdaq: AKAM  ) and Cephalon (Nasdaq: CEPH  ) among its top holdings at the end of October -- is estimated to distribute a whopping $8.39/share to investors this year.

The upshot? You should wait until after its distribution has occurred before diving into a new fund. And while you're waiting, you might also consider checking out -- for free -- the current issue of the Fool's Champion Funds newsletter, in which we detail the seven things every smart investor should know about mutual fund distributions.

2. Resolve to go auto.
Dollar-cost averaging is a great way to invest in mutual funds, particularly since many shops lower their initial investment minimums if you agree to kick in a set amount each month. Indeed, T. Rowe Price -- home to four of our newsletter's recommendations -- reduces that hurdle to just $50 for every fund it offers if you go auto.

Do yourself a favor, then, and set the dollar-cost averaging wheels in motion now. That way, when next year rolls around you'll be ahead of the game and up and running with your investment regimen. Convenient, no? And speaking of 2007 .

3. Gear up for next year.
Mr. Market can move in mysterious ways over the course of a year, taking your funds along for the ride. Among fund categories, large-cap value -- a peer group that favors the likes of Countrywide Financial (NYSE: CFC  ) , Citigroup (NYSE: C  ) , and Duke Energy (NYSE: DUK  ) -- has been among the industry's better performers over the past year, and you may find that your exposure there is greater than you'd originally intended.

If so, you'll want to identify those areas that may need some bulking up, and here's a tip on that front: Large-cap growth funds and those that specialize in health care stocks such as Bristol-Myers Squibb (NYSE: BMY  ) and Pfizer (NYSE: PFE  ) have been in the relative dumps over the past year. With that in mind, now's a good time to consider sending new dollars in that direction of the fund universe.

The Foolish bottom line
Not just any fund will do, of course, and Champion Funds exists to zero in on the cream of the industry's crop. We've done the homework for you, in other words, and identifying the best funds of all types -- large-cap growth and health care included.

If you'd like to take a look at our list of recommended funds -- as well as our back issues and members-only boards -- just click here for a completely free 30-day guest pass. Champion Funds provides a quick and easy way to hit the ground running in 2007, and there's no obligation to stick around if you find it's not for you.

Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service, and at the time of publication didn't own any of the securities mentioned above. Vanguard Explorer is a Champion Funds pick. Akamai is a Rule Breakers pick. Duke Energy is an Income Investor pick. Pfizer is an Inside Value pick. You can check out the Fool's strict disclosure policy by clicking right here.


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