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Mutual funds must measure tax bite

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Investors will soon have a valuable new tool to evaluate the performance of mutual funds.

The Securities and Exchange Commission recently ruled that mutual-fund companies must disclose their after-tax returns to give investors a better understanding of the impact of income taxes on fund performance.

As of April 16, mutual-fund companies will be obligated to include after-tax information in fund advertisements, and results for the past one-, five, and 10-year periods in the fund's prospectus.

The figures will be computed by using the highest federal income-tax rate of 39.6 percent.

Tax-deferred options like 401(k) and 403(b) plans, Individual Retirement Accounts, and Roth IRAs are exempt from the new mandate.

On average, the SEC reported, taxes take a 2.5 percent bite out of stock-fund returns each year. And while some funds are levied for little or no taxes, the least tax-efficient funds lose as much as 5.6 percent of their annual return to Uncle Sam.

In 1998, shareholders paid $39 billion in taxes from their mutual-fund holdings. The high fees, in tandem with a growth in the numbers of stock and bond fund investors, prompted Congress to push for the new disclosure rules.

(c) Copyright 2001. The Christian Science Monitor


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