Shareholders of taxable equity funds are losing almost a quarter of potential returns because of taxes, according to a recent research study.
The news was worse, according to Lipper, for owners of taxable fixed income fund shares, who lost 45% of returns to taxes to the equity holders 24%. Even in a year with the second lowest amount of capital gains and dividends since 1995, fund investors paid $6.5 billion in taxes, in what Lipper called a "conservative estimate."
Five-year returns were more affected by fund expenses, the area that New York Attorney General Eliot Spitzer has railed against during the recent mutual fund scandal.
In offering suggestions as to how to change the problems of return-stifling taxation, Lipper said "fund families and their boards should place more importance on serving the taxable investor by stressing after-tax performance and by providing compensation packages that reward tax-efficient behavior at the fund level." Instead of placing all the importance on fund expenses, the research firm said companies should consider placing after-tax performance indicators in their annual contracts.