Abstract
Investment taxes have a substantial impact on the performance of taxable mutual fund investors. Mutual funds can reduce the tax burdens of their shareholders by deferring the realization of capital gains and by accelerating the realization of capital losses. Such tax avoidance strategies constrain the investment opportunities of the funds and might reduce their before-tax performance. In contrast, we find that tax-efficient equity funds do not just reduce the tax burdens of their investors, they also exhibit lower trading costs, favorable style exposures, and superior selectivity.
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