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Investors prefer visiting dentist to paying taxes on investments

Investors are a curious bred. They love making money off of their investments but many would rather visit the dentist than pay taxes on those investments. In the mutual fund arena, however, taxes are a very real part of investing whether funds have a positive performance year or not. That's the bad news.

The good news is, thanks to the Mutual Fund Tax Awareness Act of 2000, investors will now get a look at the impact that the capital gains taxes and dividend distributions they're saddled with paying have on their fund's return. That's because, as of Feb. 15, 2002, all funds must include both the pre- and after-tax returns of the fund in their prospectuses. ( The after-tax returns are calculated based upon the highest applicable individual federal income tax rate thereby provide investors with "worst case" tax scenario.)

"This SEC rule is one of the last great things that Arthur Levitt did before leaving his post as chairman of the Securities and Exchange Commission," says Duncan Richardson, portfolio manager of the Eaton Vance Tax-Managed Growth Fund, (EXTGX). "What was mandated was the pre- and after-tax disclosure of a mutual fund's returns for the one-, five-, and 10-year periods in the risk/return section of each fund's prospectus."

Richardson said it was important to include that data in the risk/return section of a fund's prospectus because of the large variation in the tax efficiency of different mutual funds and fund investment styles. "The benefit of this disclosure rule is shareholders can now see that there can be differences of 200, 300, or 400 basics points a year in terms of after-tax return in a fund because some (investment) styles are just so much less tax-efficient than others."

Eaton Vance, (800-225-6265), as a management company is well-known for its sensitivity to the impact taxes play on investment returns and has a long history of offering the public mutual funds managed for tax-efficiency. In a recent study conducted for them about investments and taxes, 68 percent were not aware of the SEC ruling mandating funds to include pre- and after-tax returns in their prospectuses.

And, when asked, When thinking about investments, what does the term "tax-efficiency" mean to you?, 27 percent said it meant paying as little as possible in taxes; 27 percent didn't know what it meant; 22 percent thought it meant investments that grow tax-deferred; and 14 percent thought it meant the difference between the return before and after taxes.

The study also showed that many brokers and financial planners aren't talking with their clients about the tax implications of there investments. Forty-two percent said that taxes weren't discussed at all or very little. If that's the case with you and your advisor/broker/financial planner, get hip. Make sure to broach the subject. Or better yet, become a financially literate investor and make sure to check a fund's prospectus for impact taxes have had on its historic total returns before investing. After all, it's your investment nest egg you're hoping to grow not Uncle Sam's.

Oh, regarding the dentist and the taxes references, 57 percent of investors think paying taxes on their investments is worse than going to the dentist, according to the study. And, 74 percent think paying taxes on investment returns is worse than visiting prospective in-laws.


Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

To read more articles, please visit the column archive.

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