(MONEY Magazine) – People often ask me: "What's the dumbest mistake you can make investing in mutual funds?" In my mind, there's little doubt about the answer: buying a distribution. And the end of the year is precisely when most people make this mistake, so listen up: You'd better think twice before sending a check to that stock or bond fund you've been eyeballing.

Let me explain what "buying a distribution" is, and then we'll talk about how to avoid it. Federal law says that a fund that has taken profits on some investments must pass virtually all the gains on to you in cash or new shares of the fund, whichever you prefer. That may sound good, but it's not. Why? Because the distributions are taxable.

To see what I mean, let's take a real fund, Safeco Growth, and two hypothetical investors, Willie Rush and Wanda Waite. On Sept. 28, 1995, Rush put $5,000 into this fund. Since its net asset value (NAV) per share was $21.38, that bought him 234 shares. The next day, Safeco Growth declared $5.55 per share in distributions. (On Rush's 234 shares, that added up to about $1,300.) Safeco Growth's NAV per share accordingly fell by $5.55 from $21.38 to $15.83. Rush had signed up to reinvest his distributions, so he received 82 new shares. The result? Rush owned 316 shares, still worth $5,000. But Uncle Sam says every penny of Rush's $1,300 in distributions is taxable. At a 28% federal tax rate, Rush would have to fork over $364 to the IRS.

Now look at Wanda Waite. She knew to ask Safeco if a distribution was coming and thus bought Safeco Growth on Sept. 29, after the gains were paid out. For her $5,000, Waite got 316 shares, the same as Rush ended up with--but her tax liability was zero.

What a difference a day makes! By buying one day too soon, Rush handed an appalling 7.3% of his investment over to the IRS.

Unfortunately, fund companies may not warn you about this hazard unless you ask. A few weeks ago, I called the toll-free lines at 17 no-load fund companies and posed a simple question that could apply to many Money readers: "At the beginning of December, I'll be receiving a $10,000 inheritance. Are there any special considerations to investing in mutual funds in December?"

At about half the fund companies, the service representatives were right on the ball. "A lot of growth funds pay distributions in December," said a helpful rep at the Acorn Funds, "so if you buy right before that, you'll get part of your principal back as a taxable distribution. It's better to wait till after that's been paid." And reps at Dreyfus, Invesco, Neuberger & Berman, T. Rowe Price, Scudder, Strong and USAA gave me the same good advice.

But the reps at several fund families muffed the question. "Here at Fidelity," said one, "we don't try to time the market. If you're a long-term investor, the time of year that you buy doesn't matter in the end." I got similar responses from Montgomery, Nations Fund and Twentieth Century. Only after I pressed them by asking "But isn't there some tax complication to buying in December?" did the reps at these firms finally tell me that I should defer my year-end purchases until January.

At the bottom of the class in this admittedly unscientific test were phone reps at Janus, PBHG and Vanguard. "I'm really not familiar with any tax complications in December," said a person at Janus. A PBHG rep told me: "You'll have to file a tax form, but it's no big deal and you'll have to do that no matter what time of year you buy." Lastly came a clueless voice at Vanguard: "From a tax point of view, I don't think the time of year really matters very much. Let me see: Any gain or loss would be short term, but other than that I can't really tell you anything."

Officials at the fund companies whose phone reps were off the mark tell me that their service staffers are well trained in tax matters and that the lousy advice I got was highly unusual. And several of the companies say they remind their phone reps in November to warn potential investors about the distribution problem. But clearly you can't count on every fund company to watch out for your best interests when it comes to taxes. Here's how to help yourself:

--Before buying a fund from September through December, when most stock funds make distributions, ask when the next payout will be and get an estimate of its per-share value. If it's more than, say, 5% of the NAV, wait till after the payout to buy.

--Be careful buying into a fund that has just changed managers. A new skipper may want to unload many of his predecessor's picks, and such sales can generate big taxable gains. If a fund has a new manager, ask whether his stock-picking style is similar to the old manager's. If it's not, defer your purchase.

--If you do buy a big distribution by mistake and Dec. 31 has not yet rolled around, sell all your shares in the fund immediately. Then you can treat up to $3,000 of the distribution as a capital loss, reducing your taxable income for the year. If you really like the fund, you can buy it back--but make sure you wait at least 31 days to do so.

Remember: The more tax-wise you are, the better your investment results will be.