How does end-of-year interact with mutual fund prices (if it does)?
"This answer is applicable to the US.  Similar rules may hold in some other countries as well.   The shares in an open-ended (non-exchange-traded) mutual fund are not traded on stock exchanges and the ""market"" does not determine the share price the way it does for shares in companies as brokers make offers to buy and sell stock shares. The price of one share of  the mutual fund (usually called Net Asset Value (NAV) per share) is usually calculated at the close of business, and is, as the name implies, the net worth of all the shares in companies that the fund owns plus cash on hand etc divided by the number of mutual fund shares outstanding. The NAV per share of a mutual fund might or might not increase in anticipation of the distribution to occur, but the NAV per share very definitely falls on  the day that the distribution is declared. If you choose to re-invest your distribution in the same fund, then you will own more shares at a lower NAV per share but the total value of your investment will not change at all.  If you had 100 shares currently priced at $10 and  the fund declares a distribution of $2 per share, you will  be reinvesting $200 to buy more shares but the fund will be selling you additional shares at $8 per share (and of course, the 100 shares you hold will be priced at $8 per share too.  So, you will have 100 previous shares worth only $800 now + 25 new shares worth $200 for a total of 125 shares at $8 = $1000 total investment, just as before. If you take the distribution in cash, then you still hold the 100 shares but they are worth only $800 now, and the fund will send you the $200 as cash. Either way, there is no change in your net worth. However, (assuming that the fund is is not in a tax-advantaged account), that $200 is taxable income to you regardless of whether you reinvest it or take it as cash. The fund will tell you what part of that $200 is dividend income (as well as what part is Qualified Dividend income),  what part is short-term capital gains, and what part is long-term capital gains; you declare the income in the appropriate categories on your tax return, and are taxed accordingly. So, what advantage is there in re-investing? Well, your basis in those shares has increased and so if and when you sell the shares, you will owe less tax. If you had bought the original 100 shares at $10 and sell the 125 shares a few years later at $11 and collect $1375, you owe (long-term capital gains) tax on  just $1375-$1200 =$175  (which can also be calculated as $1 gain on each of the original 100 shares = $100 plus $3 gain on the 25 new shares = $175). In the past, some people would forget the intermediate transactions and think that they had invested $1000 initially and gotten $1375 back for a gain of $375 and pay taxes on $375 instead. This is less likely to occur now since mutual funds are now required to report more information on the sale to the shareseller than they used to in the past. So, should you buy shares in a mutual fund right now? Most mutual fund companies publish preliminary estimates in November and December of what distributions each fund will be making by the end of the year. They also usually advise against purchasing new shares during this period because one ends up ""buying a dividend"".  If, for example, you bought those 100 shares at $10 on the Friday after Thanksgiving and the fund distributes that $2 per share  on December 15, you still have $1000 on December 15, but now owe taxes on $200 that you would not have had to pay if you had postponed buying those shares till after the distribution was paid. Nitpickers: for simplicity of exposition, I have not gone into the detailed chronology of when the fund goes ex-dividend, when the distribution is recorded,  and when cash is paid out, etc., but merely treated all these events as happening simultaneously."
"First, you don't state where you are and this is a rather global site.  There are people from Canada, US, and many other countries here so ""mutual funds"" that mean one thing to you may be a bit different for someone in a foreign country for one point.  Thanks for stating that point in a tag. Second, mutual funds are merely a type of investment vehicle, there is something to be said for what is in the fund which could be an investment company, trust or a few other possibilities.  Within North America there are money market mutual funds, bond mutual funds, stock mutual funds, mutual funds of other mutual funds and funds that are a combination of any and all of the former choices.  Thus, something like a money market mutual fund would be low risk but quite likely low return as well.  Short-term bond funds would bring up the risk a tick though this depends on how you handle the volatility of the fund's NAV changing.  There is also something to be said for open-end, ETF and closed-end funds that are a few types to consider as well. Third, taxes are something not even mentioned here which could impact which kinds of funds make sense as some funds may invest in instruments with favorable tax-treatment. Aside from funds, I'd look at CDs and Treasuries would be my suggestion.  With a rather short time frame, stocks could be quite dangerous to my mind. I'd only suggest stocks if you are investing for at least 5 years.  In 2 years there is a lot that can happen with stocks where if you look at history there was a record of stocks going down about 1 in every 4 years on average.  Something to consider is what kind of downside would you accept here?  Are you OK if what you save gets cut in half?  This is what can happen with some growth funds in the short-term which is what a 2 year time horizon looks like.  If you do with a stock mutual fund, it would be a gamble to my mind.  Don't forget that if the fund goes down 10% and then comes up 10%, you're still down 1% since the down will take more." What is the question?  A total return fund seeks to just maximize total returns, as opposed to benchmark tracking, low vol, high vol, sectoral, whatever, this is just a name you gotta read the long prospectus to see how they are supposed to go about doing it.  Fixed income investing DOES NOT rely on on interest rates, it relies on the movements of interest rates (this is a key difference).  When economies are doing poorly, there is a flight to quality (everyone is scared and lends only to governments) driving government interest rate downs and increasing the spread between government rates and corporates.  My usual advice is There is never a good time to buy a mutual fund :P, better to buy an ETF or a portfolio of ETF's that correspond to your views.  You need to sit down and ask yourself what type of risk tolerances you're willing to take as mutual funds by construction deliver negative alpha due to fees. &gt; Could you discuss why the lack of restrictions on these subjects would make hedge funds more attractive to wealthy investors as opposed to mutual funds?  Well just think about it this way.   You have two soccer players. They both know the game extremely well, they both have similar styles of plan, and similar strategies. They're *very* good players.   Now, you change the rules for one of the players. He has to wear a 20 pound weight vest on him at all times, and can only kick the ball with his right foot when shooting, but his left when passing.   Who do you think would win in a one v. one?  ________________________________________________  Mutual funds are offered to the *general public* (most of them, anyways), which works under certain assumptions about possible investors. While investments with these funds are still considered risky, the restrictions placed on mutual funds are designed to promote safety of principle. For instance, mutual funds are restricted in short selling and trading on margin. Mutual funds must also clearly state what securities they're going to get into, what strategy they'll follow, etc., and deviations from this can get them into trouble.  Hedge funds have no such restrictions. Therefore, they can pursue any type of investment they want. Hedge funds have invested or tried to invest in everything from stocks to private equity to bitcoin to art to rare violins to property to contracts to get boats to and from the statue of liberty to water rights to lawsuit settlements to....   This relative freedom gives them MUCH more flexibility, and thus they can earn above-average returns. These lack of restrictions also makes them MUCH riskier, and additionally the way they're legally set up means only a specific type of investor, called an *accredited investor* in the U.S., can invest.   What does it take to be an accredited investor? Basically, either be rich in income $200k a year if single, $300k if married), or be rich in wealth (net worth of $1MM, not counting primary house). "A mutual fund's return or yield has nothing to do with what you receive from the mutual fund. The annual percentage return is simply the percentage increase (or decrease!) of the value of one share of the mutual fund from January 1 till December 31. The cash value of any distributions (dividend income, short-term capital gains,  long-term capital gains) might be reported separately or might be included in the annual return.  What you receive from the mutual fund is the distributions which you have the option of taking in cash (and spending on whatever you like, or investing elsewhere) or of re-investing into the fund without ever actually touching the money. Regardless of whether you take a distribution as cash or re-invest it in the mutual fund, that amount is taxable income in most jurisdictions. In the US, long-term capital gains are taxed at different (lower) rates than ordinary income, and I believe that long-term capital gains from mutual funds are not taxed at all in India. You are not taxed on the increase in the value of your investment caused by an increase in the share price over the year nor do you get deduct the ""loss"" if the share price declined over the year. It is only when you sell the mutual fund shares (back to the mutual fund company) that you have to pay taxes on the capital gains (if you sold for a higher price) or deduct the capital loss (if you sold for a lower price) than the purchase price of the shares. Be aware that different shares in the sale might have different purchase prices because they were bought at different times, and thus have different gains and losses.  So, how do you calculate your personal return from the mutual fund investment? If you have a money management program or a spreadsheet program, it can calculate your return for you. If you have online access to your mutual fund account on its website, it will most likely have a tool called something like ""Personal rate of return"" and this will provide you with the same calculations without your having to type in all the data by hand. Finally, If you want to do it personally by hand, I am sure that someone will soon post an answer writing out the gory details." "We're in agreement, I just want retail investors to understand that in most of these types of discussions, the unspoken reality is the retail sector trading the market is *over*. This includes the mutual funds you mentioned, and even most index funds (most are so narrowly focused they lose their relevance for the retail investor).  In the retail investment markets I'm familiar with, there are market makers of some sort or another for specified ranges. I'm perfectly fine with no market makers; but retail investors should be told the naked truth as well, and not sold a bunch of come-ons. What upsets me is seeing that just as computers really start to make an orderly market possible (you are right, the classic NYSE specialist structure was outrageously corrupt), regulators turned a blind eye to implementing better controls for retail investors.  The financial services industry has to come to terms whether they want AUM from retail or not, and having heard messaging much like yours from other professionals, I've concluded that the industry does *not* want the constraints with accepting those funds, but neither do they want to disabuse retail investors of how tilted the game is against them. Luring them in with deceptively suggestive marketing and then taking money from those naturally ill-prepared for the rigors of the setting is like beating up the Downs' Syndrome kid on the short bus and boasting about it back on the campus about how clever and strong one is. If there was as stringent truth in marketing in financial services as cigarettes, like ""this service makes their profit by encouraging the churning of trades"", there would be a lot of kvetching from so-called ""pros"" as well. If all retail financial services were described like ""dead cold cow meat"" describes ""steak"", a lot of retail investors would be better off. As it stands today, you'd have to squint mighty hard to see the faintly-inscribed ""caveat emptor"" on financial services offerings to the retail sector.  Note that depending upon the market setting, the definition of retail differs. I'm surprised the herd hasn't been spooked more by the MF Global disaster, for example, and yet there are some surprisingly large accounts detrimentally affected by that incident, which in a conventional equities setting would be considered ""pros""." Right now, the unrealized appreciation of Vanguard Tax-Managed   Small-Cap Fund Admiral Shares is 28.4% of NAV. As long as the fund   delivers decent returns over the long term, is there anything stopping   this amount from ballooning to, say, 90% fifty years hence? I'd have a heck of a time imagining how this grows to that high a number realistically.  The inflows and outflows of the fund are a bigger question along with what kinds of changes are there to capital gains that may make the fund try to hold onto the stocks longer and minimize the tax burden. If this happens, won't new investors be scared away by the prospect of   owing taxes on these gains? For example, a financial crisis or a   superior new investment technology could lead investors to dump their   shares of tax-managed index funds, triggering enormous capital-gains   distributions. And if new investors are scared away, won't the fund be   forced to sell its assets to cover redemptions (even if there is no   disruptive event), leading to larger capital-gains distributions than   in the past? Possibly but you have more than a few assumptions in this to my mind that I wonder how well are you estimating the probability of this happening. Finally, do ETFs avoid this problem (assuming it is a problem)? Yes, ETFs have creation and redemption units that allow for in-kind transactions and thus there isn't a selling of the stock.  However, if one wants to pull out various unlikely scenarios then there is the potential of the market being shut down for an extended period of time that would prevent one from selling shares of the ETF that may or may not be as applicable as open-end fund shares. I would however suggest researching if there are hybrid funds that mix open-end fund shares with ETF shares which could be an alternative here. Let's say I have $10,000, and I invest said monies in mutual fund   XXXXX at $100/share, effectively giving me 100 shares. Now, let's   assume at the end of the year I have a 5% return. My $10,000 is now   $10,500. At what point does my investment benefit from compounded interest?   Monthly? Quarter? Yearly? Does it even benefit? Daily would be my answer as your investment, unless you are selling shares or not re-investing distributions is getting the following day's change that impacts the overall return. Consider how if your fund went up 2% one day and then 2% another day from that $10,000 initial investment. The first gain brings it up to $10,200 and then the second makes it $10,402 where the extra $2 is from the compounding. The key though is that these are generally small movements that have to be multiplied together. Note also that if your fund goes up and down, you may end up down overall given how the returns compound. Consider that your $10,000 goes up 10% to $11,000 and then down 10% to result in $9,900 as the return for up x% and down x% is (1+x)(1-x)=1-x^2 which in this case is 1% as 10% of 10% is 1%. The key is how long do you keep all the money in there so that the next day is applied to that amount rather than resetting back to the initial investment. that's just it, though - they are splitting up the 1%! and in most cases, especially vanguard, they are splitting up far less.  ETFs don't have 12b-1 fees. explaining why you're experiencing different returns for ETFs will almost certainly involve something other than their expense. again, this is especially true for vanguard. they have the cheapest ETFs around (though i think schwab beats them on a few now).  i can only guess at the full compensation structure. betterment likely earns money on cash reserves and  securities hypothecation (i guess?). they also charge a small fee from what i understand. finance is very slim these days.  i guess i'm wondering what your ultimate question is. if it's the inter corporate compensation structure, above is my best guess. if it's about performance, then we need to compare the ETFs you are looking at. if it's about the fees on funds, i think we covered that!  as an advisor, it's my experience that very specific inquiries about fees have a deeper concern. people hear a lot about being overcharged so cost is a very standard place for clients to initially look when trying to compare performance of portfolios or securities.