TAXES are going up in many parts of the United States. And the increase in taxes - both actual or merely anticipated, such as at the federal level - is causing scores of individuals to shelter their investments by shifting assets into tax-free mutual funds. Tax-free municipal bond funds and tax-free money market funds have been ``one of the largest categories of mutual funds attracting new monies in recent years,'' says Erick Kanter, a spokesman for the Investment Company Institute, in Washington. ``Because of new taxes in many areas, we can expect that pattern to continue, if not increase.'' The ICI is the main national trade association for the mutual fund industry.
``Our tax-exempt funds have grown by about $2 billion for the first half of this year,'' says Monte Gordon, an official of the Dreyfus Corporation. Most of that money, Mr. Gordon says, represents ``new investments,'' not money shifted from other mutual funds. In the first half of the year, he notes, tax-exempt funds have increased by about the same amount as for all of 1989, clear indication that there has been renewed attention to tax-exempt funds. Currently, Dreyfus has about $18 billion in tax-exempt funds.
In recent months, tax increases have been been enacted or initiated in such already high-tax states as New York, New Jersey, and Massachusetts. In Connecticut, there is talk about introducing a state income levy; and tax talk is under way in California. And, of course, at the federal level, President Bush has indicated his willingness to accept tax increases as part of a bipartisan budget agreement.
Tax-free mutual bond funds can be found at both the national and state level. The bond funds buy long-term debt obligations issued by state and local governments. The tax-free money-market funds buy short-term obligations issued by similar state or local government institutions.
Assets in all tax-exempt municipal bond funds were $111 billion at the end of May, a little more than one-tenth of all mutual funds. This category is outpacing all others types of mutual funds, according to the ICI. Total assets of all mutual funds were $1.03 trillion at the end of May.
Indeed, the pattern since the beginning of this year is clearly one of increase for the tax-exempt bond funds: Total sales for the tax-exempt funds, including reinvested dividends, were $12.3 billion for the first five months of 1990. That compares with total sales, including reinvested dividends, of $11.5 billion for the same period last year.
Meanwhile, assets of tax-exempt money market funds are now at around $75.5 billion and growing.
``We're seeing significant increases in our assets [for tax-exempt funds] over the year-to-date period,'' says Heidi Baxter, marketing manager for the tax-free funds of Fidelity Investments, based in Boston.
Fidelity, like most major mutual fund firms, offers a wide choice of federal and state tax-exempt funds: it has 12 tax-free money market funds and 20 bond funds. On the bond side, seven of the funds are at the federal level and 13 are state funds.
In New Jersey, state officials recently enacted the largest tax hike in the Garden State's history.
But look what's happening on the tax-exempt front: the gain in assets for Fidelity's New Jersey tax-exempt funds has been $218 million through the end of June, compared with a gain of $183 million for the same period last year, says Ms. Baxter. The Fidelity tax-exempt long-term bond fund in New Jersey, which has a minimum investment of $2,500, has some $198 million in assets.
Fidelity's New York state tax-exempt assets are up about 22 percent this year, compared with flat growth last year. In Connecticut, Fidelity began a tax-free money market portfolio last September. Since then, the fund has shot up to some $316 million in assets.
``There's a growing realization that taxes are not likely to get smaller; people realize that municipal obligations remain one of the clear avenues for sheltering income,'' says Carrol McGinnis, president and chief operating officer of Transamerica Fund Management Company, Houston. For many people, the main drawback is the minimum investment, which typically ranges between $2,500 and $3,000.