Montreal, Canada

Every year at this time I make it a point to warn investors about the pitfalls on investing in mutual funds and exchange-traded-funds, or ETFs. That's because under most market conditions the end of the year means per share distributions – usually in the form of capital gains, interest income and dividends -- depending on the investment objective of that product. And if you buy these securities in December you might be forking over an unwanted share of per share taxes due for the 2009 fiscal year.

Basically, if you purchase a mutual fund or an ETF this month you will probably receive a year-end distribution – normally a capital gain if a growth-based strategy or interest income if a fixed-income fund. Those distributions usually arrive the last ten days or so of the month. That's a tax worth avoiding since you're a latecomer to the investment product and having to pay someone else's fair share of tax is just not smart investing.

Instead, consider waiting until January when all mutual fund and ETF distributions for the 2009 tax year are completed. That way you won't have to pay that unnecessary tax bill.

To be sure, 2009 won't result in a landslide capital gains payout for most equity funds or hybrid mutual funds. Last year was a disaster for most risk-based investments and the majority of U.S.-based mutual funds will use the loss carry-forward rule to offset 2009 gains. This applies to stocks, which tanked almost 40% in 2008.

In 2009, the average U.S. growth fund has gained 34%. But in 2008, the average growth fund fell more than 40%. Despite this year's rally most investors are still down about 20% since January 2008.

Fixed-income funds, however, are a different story this December.

Though most non-Treasury fixed-income strategies declined sharply in 2008, the majority of these products surged this year as the credit crisis peaked in March. This means most investors have probably recovered their losses from last year and might be sitting on unrealized gains this month ahead of mutual fund distributions.

Junk bond funds, for example, which crashed more than 26% in 2008, have returned about 40% in 2009 leaving investors with a modest capital gain since the beginning of 2008 and a big distribution if they came aboard earlier this year. That's one fund sector you want to avoid now because they'll book the biggest gains later this month.

Again, if you're debating a fixed-income fund or ETF wait until January before making that investment.

Hedge funds, however, don't make distributions so year-end purchases won't alter your tax situation. It's the same with managed futures fund or Commodity Trading Advisors. These alternative investment products typically don't issue year-end distributions.

Traditional mutual funds, or stock and bond funds and ETFs, should be avoided until January. There's no need to pay someone else's taxes.