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To: Poet who wrote (56834)	12/26/1999 2:34:00 PM
From: T L Comiskey	Respond to of 152472

Sunday - 13:53 12/26/99, EST Taxes Bite Mutual Fund Investors BOSTON (Reuters) - A recent study by KPMG Peat Marwick found that taxes reduce the annual returns of mutual funds by 2.6 percentage points annually. What's more, you can do something about it. First, identify the culprit. Your tax bill depends in part upon the trading habits of your fund managers. Stock fund managers tend to trade a great deal in fact, the average equity fund turns over 90 percent of its portfolio each year. When a fund sells a stock for a profit, that creates a taxable gain for the fund's shareholders. One response to that problem is to invest in funds with relatively low turnover rates. For example, you'd expect that a fund with a 60 percent turnover rate would generate fewer taxable gains than a fund with a 90 percent or 110 percent turnover. Unfortunately, the figures used to calculate turnover can be misleading for example, it doesn't say anything about which stocks a fund sells, an issue that can have an enormous impact on taxes. Some investors also avoid funds that have large unrealized capital gains that is, funds that hold stocks that have climbed a great deal from their purchase price. But that approach rules out almost any fund that has recorded sizable profits in the recent past. Fortunately, there are ways to reduce the taxes you pay on your fund holdings. For starters, you should take full advantage of tax-qualified investment accounts such as 401(k)s, IRAs and the like. Such accounts allow you to defer taxes on gains until you withdraw your money typically not until after you are retired. Meanwhile, your money can grow tax-deferred, regardless of your fund managers' trading habits. Meanwhile, you should give careful thought to which funds you put in ordinary taxable investment accounts, where you'll be taxed on each year's fund distributions. Increasingly, some funds are managed to reduce shareholders' tax burdens. Such funds earn high ratings for ``tax efficiency' from rating services such as Morningstar (available in most libraries or at www.morningstar.net). They may be your best bet for taxable accounts. Tax-efficient funds tend to include index funds such as Vanguard 500 Index (800-662-7447; $3,000 minimum investment; no load) that buy large company stocks, because such funds have extremely low turnover. (That low turnover also helps keep their trading expenses low, which also can boost your returns.) Municipal bond funds are another type of tax-efficient fund, because income from them is exempt from federal taxes. Meanwhile, many fund sponsors have created funds that are designed to be tax efficient. The funds tend to have low turnovers, and also take taxes into account when deciding which stocks to sell at various times. Example: USAA Growth and Tax Strategy (800-382-8722; $3,000 minimum; no load); which typically holds a mix of tax-exempt bonds and blue-chip stocks. The fund's recent turnover rate was only 63 percent. Another option is JP Morgan Tax-Aware U.S. Equity (800-521-5411; $2,500 minimum; no load), whose portfolio recently boasted a mere 20 percent turnover rate. To decrease the effect of capital gains, the fund employs a proprietary model that focuses on tax efficiency. You also can reduce your tax bill by being careful about which shares you sell when you decide to reduce your holdings in a particular fund. Your taxable gain on such sales is based upon the sale price minus the price you originally paid for the shares. Thus, you should try to sell shares that you bought at higher prices. Example: Let's say you bought 500 shares of a fund at $10 a share, and later bought another 500 at $20 a share. Now, you want to reduce your investment by 500 shares. You can instruct your fund sponsor to sell the 500 shares that you bought at $20. That way, your taxable gain is $10 a share, or a total of $5000. Your tax bill: Around $1,000, assuming a tax rate of 20 percent. By contrast, what if you sold the shares you bought for $10? In that case, you'd have a taxable gain of $10,000. That could double your tax bill from $1,000 to $2,000. Beware, however. You have to tell your fund sponsor to sell the more expensive shares. Otherwise, you'll probably end up paying more taxes than necessary this year and who wants to do that?