High turnover in a mutual fund can push up income taxes.

By , Staff writer of The Christian Science Monitor

Now that they've had a few weeks to get over the strain of the income tax season, many people are looking for ways to ease this year's tax bite so that next spring's exercise with the 1040 won't be so strenuous.

One thing good tax planners eventually learn is that there is rarely one single thing they can do to cut taxes. But by taking a little here, a little there, and a little somewhere else, they often find themselves with a lighter income tax burden the following April.

One of those little measures that can help, says Gerald W. Perritt, is to keep track of something called ''portfolio turnover'' in your mutual fund. Mr. Perritt is editor of Investment Information Services, a Chicago firm that publishes a monthly newsletter immodestly called The Mutual Fund Letter.

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A high ranking on one of the many performance lists, he points out, is based on returns to the fund, not necessarily returns to the the investor. Many funds with a high ranking also have a very high turnover rate, Mr. Perritt says. This means they buy and sell the securities in their portfolios somewhat frequently. And any securities that are sold for profit in less then a year are subject to higher short-term capital-gains tax treatment. Most investors are aware of this when it comes to the stocks they trade themselves, but if the stocks are ''hidden'' in a mutual fund, it doesn't seem quite so obvious.

The effects at tax time can be obviously painful, though. In a recent issue of his newsletter, Mr. Perritt compares two hypothetical funds, which he calls Fund X and Fund Y. At the end of 1982, both funds had a net asset value of $10. By the end of 1983, Fund X had reported a return of 20 percent, while Fund Y lagged with 15 percent.

Fund X paid a short-term capital-gain distribution of $1.50 and had a net asset value (NAV) at the end of 1983 of $10.50. The increase in the NAV plus the distribution works out to a 20 percent overall gain. That gain is eroded, however, when the investor has to pay taxes on the $1.50 short-term capital-gain distribution. For someone in the 50 percent bracket, that's an additional 75 cents in taxes for every share. Thus, the net investment return is actually 11.5 percent.

Fund Y, on the other hand, paid out no short-term gain distributions and ended the year with an NAV of $11.50, a 15 percent gain. But with no taxes that have to be paid on short-term distributions, the net return stays at 15 percent. If shares are sold after a year, the high-bracket investor would pay 30 cents in long-term capital-gains taxes, giving an after-tax return of 12 percent, still half a percentage point better than Fund X.

All of this becomes irrelevant, however, if the fund is part of an individual retirement account (IRA), Keogh, or some other tax-deferred program. There are, in fact, some funds specifically designed for IRAs and similar accounts that permit portfolio managers to make frequent trades free of concern about the tax consequences of short-term gains.

High turnover also becomes less important to investors in lower tax brackets. Here, it is entirely possible that a fund's good return may easily outweigh the taxing effects of high turnover. There are no formulas for determining what tax bracket can best tolerate a high portfolio turnover, Mr. Perritt says. There are also no formulas for determining when a fund is performing so well that even with a high turnover and higher capital-gains taxes, the fund is a good investment. But both performance and your tax bracket should be considered before rejecting a fund with a high portfolio turnover.

You can find the portfolio turnover rate in the fund's prospectus under ''condensed financial information'' or a similar title. Here, you can see what the rate was for each of the last 10 years, or however many are listed.

Based on his belief that mutual funds should be part of a long-term investment strategy and that meaningful returns don't show up in less than three years, Mr. Perritt argues that a fund should not have an annual turnover rate of more than about 35 percent, although rates of more than 200 percent are not uncommon.

Perritt says the problem of high portfolio turnover is more prevalent during periods of sustained increases in stock prices, such as 1982-83, when managers were trying to keep their portfolios up to date. Now, when stocks seem to be in a long-term holding pattern, may not be a period of high turnover. But when the market begins rebounding, turnover will become more important and will bear closer watching. Maryland S&L insurance

Some Maryland savings-and-loans are paying very high interest rates. The insurance, up to $100,000 per account, is provided by the Maryland Savings Share Insurance Corporation. Could you comment on the safety of the MSSIC as compared with the FSLIC (Federal Savings and Loan Insurance Corporation) and the FDIC (Federal Deposit Insurance Corporation)?

In terms of insurance dollars backing depositors' dollars, the Maryland insurance program is actually safer, because the insurance-to-deposits ratio is higher in Maryland than it is with the federal government. This is especially important to the S&Ls in that state, because many of them have been reaching far beyond their borders for deposits. They have frequently placed advertisements in out-of-state newspapers - particularly along the East Coast - for money market deposit accounts that pay as much as a full percentage point greater yield than banks and S&Ls in other areas. So if you don't live in Maryland and don't mind handling this type of account by mail, you should not be concerned about its safety.

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