- The Washington Times - Wednesday, September 4, 2002

In a grueling bear market, investors might care little about Uncle Sam's bite into mutual fund returns, since losses are likely to limit tax bills next April. But as the market seems to be starting a comeback, it might be time to consider the effect taxes can have on a portfolio.
Federal taxes consume on average about 2.5 percentage points, or up to 25 percent, of a taxable stock fund's returns for investors in the highest tax bracket, according to a new study by fund tracker Lipper Inc.
That is much more than the average 1.2 percentage-point hit taken for expenses, Lipper said.
"Investors often want to purchase a mutual fund that has low expenses, but they typically forget the tax ramifications," said Vernon Lee of Lee Investment Consulting in Raleigh, N.C. "Particularly now, with the market in a 2-year slump, that's something to think about."
Financial planners say investors have several ways to decrease their tax bills as long as they don't sacrifice higher returns in the process. The options range from tax-managed funds that aim to minimize taxable distributions to index funds with typically low turnover.
Investors need not worry about tax-deferred accounts, such as 401(k) retirement plans or individual retirement accounts, which represent up to 62 percent of mutual fund assets and aren't taxed until investors make withdrawals.
But for others, taxes are very relevant. And now that the recently implemented Securities and Exchange Commission rules require funds to publish after-tax returns in their annual reports and prospectuses, it's easier for investors to gauge how much they'll be affected by taxes.
One option is to invest in tax-managed funds offered by more than 40 fund companies after the SEC rules fully took effect this year. The Lipper study found that such funds generally performed 3 to 3.65 percentage points better than their less tax-focused counterparts for the five-year period ended Dec. 31.
"As the tax issue rises more to the forefront, fund families are stating they're going to be more tax-conscious," said Tom Roseen, a research analyst and author of the Lipper study, who is urging fund boards to offer financial incentives to managers who minimize the tax hit that shareholders take.
Still, financial planners warn against focusing too much on taxes at the expense of picking a well-performing fund.
"I would rather have a great fund with a good, long-tenured manager who follows a strict method of investing, rather than a tax-managed fund with mediocre returns," said Jack Piazza of Sensible Investment Strategies in Wheaton, Ill.


Sign up for Daily Newsletters

Copyright © 2019 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times welcomes your comments on Spot.im, our third-party provider. Please read our Comment Policy before commenting.


Click to Read More and View Comments

Click to Hide