The Vanguard Group strongly supports the Mutual Fund Tax Awareness Act's objective to provide mutual fund shareholders with better information on the actual returns of their funds. Tax Costs Taxes are the largest cost of mutual fund investment for most investors. Based on calculations using data from Morningstar, the average domestic equity mutual fund has lost nearly 2.5 percentage points per year to taxes on distributions of dividends and capital gains made to the fund's shareholders over the past ten years. Unfortunately, most investors have little or no idea about how taxes reduce their returns because the industry generally does not discuss the tax implications of mutual fund management.
Funds vary tremendously in the tax burdens they place on their shareholders.
For this reason, pretax returns can be misleading for shareholders subject to taxes on the distributions they receive. Two funds that may appear identical on a pretax basis can have very different after-tax returns. As shown in the chart below, Vanguard Growth and Income Fund outperformed Vanguard 500 Index Fund by a slight margin over the past ten years on a pretax basis. However, after considering taxes, the 500 Index Fund generated a substantially higher return. The taxable investor, on the other hand, would have accumulated greater wealth with the 500 Index Fund.