This story appears in the
June 2002 issue of
Entrepreneur.
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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 www.fundfreebies.com.