Mutual Funds Must Provide After-Tax Data

Mutual fund investors will get more information about the tax bite on their portfolios and their after-tax returns under rules adopted Friday by the Securities and Exchange Commission.

“Taxes can be the most significant cost of investing in a mutual fund,” said Paul Roye, director of the SEC’s division of investment management. Yet there is a gap in investors’ knowledge about these taxes, he said.

The rules, first proposed by the SEC in March, are designed to help investors understand the magnitude of tax costs and compare the effect of taxes on the performance of different mutual funds.

The tax effect on investors varies widely among the 7,000 or so mutual funds in this country because differences in fund investment strategies can produce markedly different tax consequences.

In 1999, mutual funds distributed about $238 billion in capital gains and $159 billion in taxable dividends, the SEC said. Fund investors had to pay taxes on those distributions, even if they didn’t sell their fund share. More than 2.5% of an average stock fund’s total return is lost annually to taxes.

The new SEC rules require mutual funds to disclose in prospectuses and annual reports their estimated one-, five- and 10-year returns on an after-tax basis so investors can compare different funds. The returns have to be shown in two ways: estimated taxes for investors who sell their fund shares and for those who stay in the fund.

Mutual fund companies currently are required to disclose only returns before taxes.

The mutual fund industry has said it supported in principle the SEC rules. Industry spokesmen say some fund companies--though far from a majority--already disclose tax effects in some form.

The SEC rules assume that taxes are levied on investors at the maximum individual federal income tax rate of 39.6%, providing a worst-case scenario.

The median income of mutual fund investors is $55,000 a year, however, far below the level that would be subject to the maximum tax rate.

Exempted from the tax disclosure requirement: money market funds and tax-deferred investments such as 401(k) plans and variable annuities.