Tax-Managed Mutual Fund

A mutual fund that invests in securities thought to have given fund shareholders the least possible tax liability. Common securities in which a tax-managed fund invests are municipal bonds, which are usually tax-free, and non-dividend paying stocks, which reduce a shareholder's capital gains tax liability. Tax-managed funds often hold on to stocks in which they invest, as stocks held for more than a year are taxed at a lower capital gains rate. They are often thought of as an alternative to tax-deferred investment vehicles, such as 401(k)s and IRAs.

tax-managed mutual fund

A mutual fund that is managed so as to maximize the aftertax return rather than the pretax return of its shareholders. Capital gains distributions are minimized by low portfolio turnover and an attempt by the portfolio manager to offset realized gains with realized losses.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

References in periodicals archive

AllianceBernstein, 2004, Biting Back at Taxes: Exploring Tax-Managed Mutual Funds, New York, NY, AllianceBernstein Investment Research and Management.

Portfolio manager ownership and mutual fund performance

But in the past five years no new type of fund has provided more good news for certain investors than tax-managed mutual funds.

(Today there are more than 10,000 funds in existence.) For tax conscious investors, tax-managed mutual funds are one solution to the problem of taxable mutual fund distributions.

Although there are fewer than 100 tax-managed mutual funds (see exhibit 1, for a sampling), their stated goal of reducing the impact of federal and state income taxes on fund returns gives clients who already contribute the maximum amount to tax-favored IRAs or 401 (k) plans another low-tax way to invest in the stock market.

Exhibit 1: A Sample of Tax-Managed Mutual Funds American Century Tax-Managed www.americancentury.com Value Fund Dreyfus Premier Tax-Managed www.dreyfus.com Growth Fund Eaton Vance Tax-Managed www.eatonvance.com International Growth Fund Evergreen Tax Strategic Equity Fund www.evergreen-funds.com Fidelity Tax-Managed Stock Fund www.fidelity.com JP Morgan Tax-Aware U.S.

As CPAs try to keep pace with the best investment vehicles to help clients realize their goals, tax-managed mutual funds are an increasingly important way clients can hold down taxes, leaving more for retirement, college funding and other key objectives.

Tax-managed mutual funds operate the way most other mutual funds do.

In evaluating tax-managed mutual funds for their clients, CPAs should use the same criteria they would use to judge any other fund, including

There are, however, some clients a CPA will find particularly suited to tax-managed mutual funds, including

A taxing problem

A study by KPMG, Tax-Managed Mutual Funds and the Taxable Investor, found that after 20 years, a $10,000 investment in a tax-managed fund would be 25% greater than a comparable investment in an actively managed fund.

The quest to outperform