It depends on the fund. For actively managed funds (or poorly managed index funds), you may have to pay tax on capital gains distributions (money paid out to you as cash that is not a dividend but is a capital gain distribution). Those distributions might be short or long term. For most Vanguard index funds, you never have this happen. Actively managed funds are more likely to have this happen because they are buying and selling shares a lot and therefore have to realize gains a lot.