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What is a Tax-Managed Fund?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 August 2016
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    Conjecture Corporation
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Tax-managed funds are mutual funds that are structured to provide the best tax situation for investors. The idea behind a tax-managed fund is to include investment options that help to minimize the tax consequences associated with the profits, while still earning the best possible return on the investments. This can be managed by employing a few different approaches to the task.

First, the tax-managed fund can focus on including only securities that are projected to offer a modest yield. By going for securities that will produce a smaller return, it may be possible to keep the investor in a lower tax bracket. The end result can be less taxes owed on the dividends and interest earned from the securities.

Another common approach employed with a tax-managed fund is to attempt to manage the distribution of capital gains to the investors. Essentially, this means structuring the mutual fund so the process is more of a buy and hold approach than a buy and sell approach. When there is less turnover on the investments that make up the tax-managed fund, the end result can be to contain the overall growth and thus minimize the taxes due for capital gains.

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The third strategy that is sometimes used with a tax-managed fund is to adopt a selling policy that is considered to be tax-efficient. This approach involves being extremely careful about analyzing the potential for capital gains of each security in the fund. The idea is to hang on to securities that will realize short term capital gains and sell the ones that are anticipated to create long term capital gains. Generally, tax rates associated with the long-term capital gains are more favorable than the rates associated with the short-term capital gains. Thus, the investor will incur less of a tax burden.

A tax-managed fund will function within the perimeters set by current financial regulations that govern all investment transactions within the country of origin. This means that any strategies used to help minimize the tax consequence to the investor will comply with the laws of the land, and be perfectly legal.

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