What is a Tax-Managed Fund?
A. It is a mutual fund in which the manager has a dual goal: to make money for the investors while minimizing the tax liabilities associated with the fund. It’s a fund that “really goes out of its way to minimize the adverse tax effects on its shareholders,” says Mercer Bullard, president and founder of Fund Democracy, an organization that lobbies on behalf of mutual fund shareholders, and assistant law professor at the University of Mississippi School of Law. “One of the potential drawbacks of investing in mutual funds is the potential higher tax liability,” Bullard says. With a tax-managed fund, fund managers weigh potential tax liabilities as well as profits. As a result, managers tend to buy assets and hold them for longer periods of time, and turnover is typically closer to 10 to 20 percent annually, he says. But keeping the taxes low will mean more to some investors than others, says Karen Altfest, CFP, vice president of L.J. Altfest & Co, in New York. “And all good mutual fund a
Tax-managed funds are mutual funds that are structured to provide the best tax situation for investors. The idea behind a tax-managed fund is to include investment options that help to minimize the tax consequences associated with the profits, while still earning the best possible return on the investments. This can be managed by employing a few different approaches to the task. First, the tax-managed fund can focus on including only securities that are projected to offer a modest yield. By going for securities that will produce a smaller return, it may be possible to keep the investor in a lower tax bracket. The end result can be less taxes owed on the dividends and interest earned from the securities. Another common approach employed with a tax-managed fund is to attempt to manage the distribution of capital gains to the investors. Essentially, this means structuring the mutual fund so the process is more of a buy and hold approach than a buy and sell approach. When there is less tur
