Fund holders feel the capital-gains pinch
Eighty-four percent of mutual-fund shareholders see taxes as an important consideration in choosing how they invest, but 1 in 4 doesn't know his or her federal income-tax bracket and is unfamiliar with the concept of "tax efficient" investing, according to a survey by financial services firm Eaton Vance Corp.
Taxes are the largest expense associated with mutual-fund investing, reducing the average stock fund's returns by more than 2.5 percent per year, according to Eaton Vance.
The bear market at the end of this past year was a rude awakening to those mutual-fund investors who found they owed taxes after their funds had low or negative returns but still paid out large, taxable distributions, says Duncan Richardson, senior vice president of Eaton Vance. Strong gains carried over from prior years was also a factor.
When asked how they deal with a loss in a stock or mutual fund, 43 percent of survey respondents said they would do nothing, 18 percent would buy more, and 16 percent said they would sell their investment to capture the tax value of the loss.
Duncan recommends investors pick tax-managed funds in which the fund manager tries to offset capital gains with losses, thereby minimizing the tax burden on the fund holder.
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