To Tell the Truth . . .

Funds fess up to the real effects of taxes on performance figures.
This story first appeared in the June 2002 issue of Entrepreneur. To receive the magazine, click here to subscribe.

Face it: Taxes can put a big dent in the return your fund kicks off. Recent studies show that five-letter word can often mean a difference of 250 basis points, or 2.5 percent, in a fund's total return once taxes are accounted for. Yikes! Trying to find out how much of a bite paying taxes on the capital gains, dividend and interest income your fund kicks off has never been easy-until this year.

Thanks to the Mutual Fund Tax Awareness Act of 2000, as of February, all mutual funds must include both pre- and after-tax returns in their prospectuses. Although the after-tax return figures you'll see reflect the worst-case scenario (they are calculated based on the highest individual tax rate), that knowledge is valuable-particularly for those whose funds are held in personal and not tax-deferred accounts. This information is also useful for comparing funds.

"Shareholders can now see that there can be differences of 200, 300 or 400 basis points a year in terms of after-tax returns," says Duncan Richardson, chief equity officer at Eaton Vance, a fund family that focuses on tax efficiency. "Those differences are because some investment styles are so much less tax-efficient than others."

Just as a fund's past performance doesn't guarantee future returns, tax bites often change. But don't let that stop you from reading the pre- and after-tax return table first in a fund's prospectus.

Dian Vujovich is an author, syndicated columnist and publisher of fund investing site

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