Dear Clients and Friends:

Many of my clients have expressed surprise at the amount of additional tax they have to pay as a result of distributions from mutual funds in which they have invested. Without doubt, the stock market has been kind to investors over the last few years and most mutual funds that invest in equities, i.e., stocks, have shown similar gains. The problem for many of us is that analysts who are focused primarily on the investment potential of individual stocks manage most mutual funds. They give little, if any, consideration to the tax ramifications of their decisions to buy or sell particular stocks.

There is however a relatively new breed of fund, so called "tax-managed" mutual funds, whose managers are required to employ a series of strategies designed to keep the investors' tax consequences to a minimum. Most of the large, well-known mutual fund organizations have established tax-managed funds. Many sophisticated investors in managing their own personal portfolios also use the techniques employed by these funds. They include:

• Taking a long-term view of investing, or, in other words, trying to avoid short-term capital gains that would be taxed to the investor at his regular tax rate.
• Reducing investment income by investing in lower-yielding equity securities that are expected to show capital appreciation.
• When selling a portion of a holding, minimizing the gain by selling those shares with the highest cost basis first.
• Selling securities that have gone down in value to generate capital losses that can be offset against realized capital gains.

In addition to tax-managed funds, you might want to also consider index funds. These are funds which invest in the stocks making up a particular market index. An example of this is the Standard & Poors index of 500 large companies. Because these funds stay invested only in the stocks making up the particular index, there are relatively few sales of stock from the portfolio and hence only a small amount of capital gain. (Sales are generally made only when there are changes in the component stocks in the index or to generate cash to satisfy redemption requests from fund shareholders.)

Please call my office at 315-363-3338 if you would like to discuss this area further.

Very truly yours,

G. William Hatfield
Certified Public Accountant
Certified Financial Planner