A number of
tax-managed funds
— funds specifically designed to be tax-efficient — appeal to investors who have been dismayed by having to pay short-term
capital gains
taxes on
distributions
from funds, especially in years when their investment in the fund has lost value.
Other funds may be tax efficient without committing themselves to that objective in their prospectuses.
Index funds,
for one, are tax efficient, in large part because their portfolio is determined by the index they track and they tend to have low
turnover rates.
Some
actively managed funds may be tax-friendly as well if part of the manager's strategy is to offset capital gains by selling investments that may have lost value and produce capital losses. Just remember that if that manager leaves, and there's no provision in the
prospectus
stating the fund's commitment to tax management, the new manager may not practice the same tax strategy.
A number of financial Web sites contain after-tax performance data for mutual funds, and since February 2002 funds have been obligated by law to disclose after-tax returns in their prospectuses. Taking the time to examine these numbers can help save you money in the long run.
Marc Lackritz
