What are Tax-Managed Funds?
Tax-managed mutual funds are funds that are said to relieve investors of the insurmountable taxes they have to pay as a result of capital gains distributions given to shareholders. This practice has resulted in happier investors as they get to hold on to more of the money they intend to invest. To help you decide if this is a good investment route for you, let’s look more closely at these funds.
Why Were Tax-Managed Mutual Funds Created?
These funds were created as a result of investors issuing complaints that just when they started making money through well-performing funds, larger amounts were being taxed to accommodate larger capital gains distributions to shareholders. So many investors were getting fed up with the practice that they began moving on to exchange-traded funds because they could take advantage of greater flexibility with capital gains.
As a result of this loss, some fund companies began introducing tax-managed mutual funds.
How Do They Work?
With standard mutual funds, investors are held at the mercy of the company and its shareholders who tax when shares are sold – and occasionally when shares aren’t sold. To combat the trauma many investors face with increased taxation, some companies try to manage the taxes by undergoing a number of strategies:
- Offsetting gains. Some companies try to find stocks that have lost money then sell them to offset the gains they made from stocks that made money.
- Making purchases in multiple lots. Taking this route allows the fund manager to pick and choose which shares have the least gains, which minimizes how much must pass through to shareholders.
- Minimizing portfolio turnover. One of the simplest and most successful ways to reduce capital gains distribution tax is to minimize the amount of buying and selling that occurs.
To investors there is nothing greater than being able to pay out as little as possible in capital gains distribution tax, and tax-managed mutual funds are making this desire a reality. So if you’re looking for a way to save money while investing, this is a road you might want to consider traveling.
