As the clock winds down on 2005, now is the time for all savvy fund investors to make sure they've got their proverbial ducks in a row for next year. That way, when the clock strikes 12:00:01 on Jan. 1, 2006, you can begin executing your master plan. I mean, you weren't really going to watch that silly ball drop in Times Square again this year, were you?

With that in mind, here are three year-end fund tips that you'll want to contemplate as you drink some bubbly and prepare for a prosperous new year.

Don't buy any funds now
Perhaps I should qualify that: Don't buy if the funds you're considering will soon be making capital gains distributions or dividend payouts. December can be the cruelest month for prospective fund investors. Why so? Well, perhaps in the spirit of the holidays, most fund companies make like Santa Claus and issue their annual distributions in December.

Fidelity Four-in-One, for example -- a fund that splits its assets among the S&P 500, the Extended Market Index, the Spartan International Index, and the U.S. Bond Index -- is estimating a $0.17 payout on Dec. 30.

Distributions aren't a problem for folks who have been invested in the fund long enough to enjoy the gains, of course -- or for those who are invested in tax-deferred accounts. Otherwise, though, if you buy a fund on the eve of a payout, you're really just buying a tax bill. Here's why: When the distribution occurs, the fund's net asset value (NAV) will be reduced by the per-share amount of the payout. Provided you've elected to reinvest the proceeds -- a practice I highly recommend -- you'll receive additional fund shares in return.

So far that's a wash, but here's where the bathwater gets dirty: The IRS regards the distribution as a dreaded "taxable event" and will send you a bill for your "earnings." Newbies haven't really earned a thing, but the IRS still has a point: You could have chosen not to reinvest the payout and spent it instead on one of those goofy dancing Santas that crowd checkout counters at drugstores everywhere this time of year.

Luckily, most funds have already made their annual distributions. Fidelity Contrafund (FUND:FCNTX) -- which focuses on value plays and owns the likes of 3M (NYSE:MMM), Yahoo! (NASDAQ:YHOO), ExxonMobil (NYSE:XOM), and even Google (NASDAQ:GOOG) -- is one of those. It paid shareholders $1.19 on Dec. 27.

So while most have paid already, the bottom line is: Don't buy a fund in a taxable account now until you've confirmed with the fund company that its distribution -- if any -- has already occurred.

Get the mix right
Job one for all savvy fund investors is coming up with an intelligent asset-allocation mix that jibes with their investment timeline and tolerance for volatility. Most folks will likely want to build their portfolios around a large-cap fund that invests primarily (if not exclusively) in U.S. companies and then diversify down the market's cap range -- and onto foreign shores -- from there.

Index stalwarts such as Vanguard Total Stock Market (FUND:VTSMX) or Fidelity Spartan Total Market (FUND:FSTMX) -- both of which track more than 1,000 companies -- make great "anchor" funds, but remember: Investing exclusively in index funds pretty much means resigning yourself to lagging the market each year by about the amount of your annual expenses.

The good news is that you don't have to invest in index funds exclusively. Indeed, I think owning both passive and actively managed funds is one of the smartest asset-allocation calls a Fool can make: In some market environments, after all, index investing dominates, while in others (the past five years, say) actively managed funds have had the upper hand.

Owning both fund flavors means never having to say you're sorry -- a point that leads me to my third and final tip.

Give Champion Funds a try -- for free
Let's face it: The vast majority of actively managed funds are duds, pricey picks with track records of underperformance, volatility, and, in some cases, scandal.

For all of those reasons, the focus at my Motley Fool Champion Funds newsletter service is exclusively on the cream of the fund industry's crop. The funds I've recommended thus far are run by battle-tested managers, folks who've been around long enough to see how their strategy plays out in various market environments and who have emerged victorious in the battle against the market. And so far, by the way, so good. (For the inside scoop on the fine performance of our picks, click here.)

Beyond the newsletter recommendations, though, our service's success owes in no small measure to our world-class discussion boards. The conversation there is always lively and informed -- not to mention informative. Indeed, I've been thinking and writing about mutual funds for quite a while now, and I learn new things on our boards all the time.

You will, too, and so I encourage you to give our service a risk-free test drive. It'll be a great way to start planning for a prosperous new year.

This article was originally published on Dec. 28, 2004. It has been updated.

Motley Fool Champion Funds analyst Shannon Zimmerman owns shares of Vanguard Total Stock Market and Fidelity Spartan Total Stock Market. 3M is a Motley Fool Inside Value recommendation. The Motley Fool isinvestors writing for investors.