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“What is a tax-managed mutual fund, and do I need one?”

As a reminder, in honor of the upcoming tax filing deadline, this week we are discussing ways to reduce your investment related taxes. Yesterday’s topic covered how different types of investments are taxed.

Today’s question deals with mutual fund selection:

“What is a tax-managed mutual fund, and do I need one?”

 

Transcript - Tax Managed (or Tax Advantaged Mutual Funds - Should You Invest in One?

As you are probably all too aware, investing can generate a lot of taxes. One way some mutual fund companies try to help investors is by launching tax-advantaged or tax-managed mutual funds which supposedly consider the tax implications of the fund’s investment decisions and limit transactions or investments that would cause increased tax burden.

That means these tax advantaged or tax managed funds may shun stocks with higher dividends, or create less portfolio turnover that would generate capital gains.

For an example of the impact of these funds, we are going to look at 2 mutual funds from DFA or Dimensional Fund Advisors. The name of the funds are U.S. Core Equity 2, and Tax Advantaged US Core Equity 2. If you want to look at them, their ticker symbols are DFQTX and DFTCX.

Their returns have been very similar over the last 12 years with average annual returns of 15.79% and 15.81% per year over the last decade.

But there is a difference in the dividend and capital distributions of the funds. In 2018 for example, the non tax advantaged fund paid a total dividend of 2.83%, compared to 2.20% for the tax advantaged fund.

For an investor with $100,000 in either of these funds in a taxable account, that means the investor using the tax advantaged fund will save about $85 a year in taxes, assuming their dividends are taxed at 15%.

Over the course of 20 years when you factor in compounding, this results in about a $3,000 difference:

TaxAdvantaged_vs_non_TAmutualfund.png


So it is an hardly earth shattering difference, but there does seem to be a slight advantaged for these tax managed mutual funds, from DFA at least. If you are investing in a taxable account, is probably something you should consider.


Find Previous Posts in our “Tax Conscious” investment series:

April 12th - “How Can I Reduce My Investment Related Taxes?”

Matt Hylland