Last year, mutual fund investors paid approximately $31.3 billion to the
"People are giving up at least 40% to 50% of their gross returns [to taxes, expenses, and loads]," said Tom Roseen, research analyst and author of the study.
The study presents a worst-case performance scenario for an investor in the highest tax bracket who invested in the U.S. diversified equity fund group, a composite of equity funds that accounts for 80% of pure equity mutual funds. Over the last five years, an investor would have lost 40% of gross returns to taxes, fund expenses and loads, reducing a gross annualized return of 10.47% to 6.25%.
A similar scenario for a bond fund investor uncovered a loss of 86% of gross returns, reducing a gross annualized return of 5.81% to 0.81%.
Lippers study uses the highest tax bracket, 38.6%, to calculate tax impact, following the guidelines set by the
If most fund investors were middle income, they would be in the 28% tax bracket, he said. "The difference between 28% and 38.1% is relatively small, only 10 basis points. The difference between zero and 28% is huge," Roseen said.
Furthermore, Roseen pointed out that the 38.1% rate may provide a fairly accurate estimate of a middle income investors total tax liability, including state and local taxes. "[The SECs after-tax performance rate] takes into account only federal taxes, so in essence it underestimates what those high tax bracket payers would be paying," he said.
The solution? Funds that dont specialize in tax management should still keep an eye of tax consequences, Roseen said. "We suggest that fund boards urge mangers to become more conscious of tax implications," he said.
Although fund managers should already be doing so, many are dropping the ball, Roseen said. "I think they should be, but I dont think they are. I think we can get some extra basis points out of there for investors, even for non-tax-managed funds."