Today's action addresses the gap between the importance of taxes to mutual fund investors and the knowledge that investors have about taxes. The following provides background information and more details on the Commission's action. Recent estimates suggest that more than two and one-half percentage points of the average stock fund's total return is lost each year to taxes. The 'tax-bite' varies widely from fund to fund. The size of the tax-bite depends on several factors, including the level of portfolio trading and the amount of gains realized on trades, as well as the degree to which the manager uses portfolio losses to offset realized gains.
Many investors lack a clear understanding of the impact of taxes on their mutual fund investments.
Types of Returns. Return after taxes on distributions and sale of fund shares includes the effect of both taxable distributions by a fund to its shareholders and any taxable gain or loss realized by a shareholder on the sale of fund shares, thereby reflecting the tax effects on shareholders of both the portfolio manager's purchases and sales of portfolio securities and a shareholder's individual decision to sell fund shares. The table will be accompanied by a short explanation of the returns presented. Distributions are taxed at historical tax rates in effect when the distributions were made rather than rates in effect when the calculation is performed. Money market fund s because the tax consequences of investing in different money market funds should be similar since their returns are generally in the form of income distributions, which are taxable on a current basis.