MUTUAL FUND PERFORMANCE Value in 2012 of $10,000 invested in 1990 in portfolios of domestic equity mutual funds Before tax After tax Tax-inefficient fund portfolio $55,800 $37,800
Tax-efficient fund portfolio $58,900 $48,800 Before tax scenario corresponds to the cumulative investment value if the fund is held in a tax-qualified retirement account.
The William Blair FCP provides a
tax-efficient fund vehicle aimed at benefiting non-US based investors.
Pensions should also not be ignored in terms of both building up a
tax-efficient fund and passing on wealth free of IHT (assuming that you do not need to take an income from the fund, which is a whole new area of wealth planning).
Morningstar warns that high tax-adjusted returns do not necessarily mean that a fund is tax-efficient; a very
tax-efficient fund with poor returns may result in low after-tax results.
The disclosure is not required to appear in advertising unless the fund is presented as a
tax-efficient fund. In the case that the fund does choose to include the after-tax returns in advertising material, the after-tax returns should be computed according to the standardized formula provided by the SEC.
"For balance," says Reading, "Guy's portfolio holds Vanguard Value Index Fund (VIVAX), which holds the low-priced value stocks in the [Standard & Poor's 500-stock index]." Like most index funds (especially Vanguard index funds), it is a low-cost,
tax-efficient fund because the managers do relatively little trading.
A
tax-efficient fund has more long-term capital gains and less investment income and short-term gains.
This is a missed opportunity to build a buffer to absorb shocks associated with unexpected health care expenses and, for those more fortunate, to accumulate additional
tax-efficient funds for later in life.
As such, it may be advisable to utilize ETFs for the stock exposure (due to their preferential treatment on year-end capital gain distributions), use tax losses to offset gains, and select more
tax-efficient funds. Although it may not be wise to place taxes at the front of the line -- which is like the tail wagging the dog -- it is an important factor to consider when constructing and managing a client's portfolio.
Tax-efficient funds aim to minimize the distributions that are made to shareholders, thereby limiting the amount of income that must be declared.
Tax-efficient funds:
Tax-efficient funds (such as index funds) are excellent long-term savings vehicles due to their low turnover, which reduces capital gains distributed over the investment's life.
Appropriate solutions for HNW individuals and small-business clients will be driven by asset allocation, risk management, consolidated statements and some alternative investment classes such as real estate and
tax-efficient funds. These solutions will be delivered through a comprehensive financial plan crafted by an experienced professional.
