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Tax-Adjusted Return

Taxes are a significant consideration for many investors who own mutual funds in taxable accounts. When a fund receives a stock dividend or interest from a bond, it will divide that dividend among its shareholders, and when a fund sells a security at a gain, it will divide that capital gain among its shareholders. Investors pay taxes on these dividends and capital gains, and they may also pay taxes on capital gains when they sell the fund.

Investors can compare the total return, load-adjusted return, and after-tax returns for a fund to understand how loads and taxes affect the performance of the fund. Investors can also use after-tax returns to compare one fund to another.

Tax-adjusted returns are adjusted for taxes and sales charges and follow the SEC guidelines for calculating returns before sale of shares. The tax-adjusted return shows a fund's annualized aftertax total return for the five- and 10-year periods, excluding any capital-gains effects that would result from selling the fund at the end of the period. To determine this figure, all income and short-term capital gains distributions are taxed at the maximum federal rate at the time of distribution. Long-term capital gains are taxed at a 15% rate. The after tax portion is then reinvested in the fund. State and local taxes are ignored, and only the capital gains are adjusted for tax-exempt funds, as the income from these funds is nontaxable.

 

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