Mutual Fund Investors Face Twice The Tax Bill Next April Portfolio Turnover Hikes Bite

U.S. investors will pay about $10 billion in mutual fund-related taxes in April, or about double what was paid last year, according to an estimate by Vanguard Group.

For fund investors, higher taxes aren’t necessarily bad news because it means they’re making more money in the financial markets. Still, some industry executives criticize fund managers for not being as diligent as they could be about keeping their shareholders’ tax bills lower than they are.

“The fact is taxes have a hugely negative impact on relative returns,” said John Bogle, chairman of Vanguard Group, the nation’s second-biggest fund company. The overall tax bill for fund investors will rise because the markets “are a lot higher, and equity funds have about 30 percent more money than they did last year,” Bogle said.

Among the steps fund managers can take to limit capital-gains taxes for their shareholders is by holding stocks for longer periods than they now do, Bogle said.

“Twenty years ago, portfolio turnover averaged 30 percent; today it averages nearly 100 percent,” Bogle said. Investors who want to reduce their tax bills should look for “low-turnover” funds, he said.

A fund’s turnover rate - the pace at which the portfolio is buying and selling securities - is disclosed in the prospectus and in financial statements mailed to shareholders twice a year.

Mutual funds usually reveal in December the dividend and capital-gains distributions that they’re going to make for that year.