No profits, but plenty of taxes

Kiplinger's Personal Finance Magazine, Nov, 1998 by Brian Knestout

This will add insult to injury: Even if your fund has lost value this year, you may still be liable for capital-gains taxes in 1998.

Whether or not you sell shares of a fund you own, you'll have taxable capital gains if your fund distributes profits it made from the sale of stocks in its portfolio. This includes gains you've reinvested in additional shares. In turbulent markets, capital gains can be doubly punishing. First, fund managers ditch volatile stocks, adding to the gains disbursed to shareholders. Then investors may stampede from poorly performing funds increasing each remaining investor's tax liability.

Oakmark fund provides a painful case in point. Shareholders unnerved by the fund's 4% loss for the year so tar also received a healthy capital-gains distribution in August. That means they'll have to pay taxes at year-end for gains on a fund that is actually losing money. Other funds rubbing salt into the wound with capital gains are Mutual Shares, down 8%; Greenspring, down 20%; and Pioneer Emerging Markets A, down a whopping 39%.

There's still plenty of time to get bitten by your fund--most mutual funds won't distribute any capital gains they've accrued until November or December. It's no help that "most managers don't pay too much attention to their tax situation when they sell shares," says Morningstar stock-fund editor Russell Kinnel.

To anticipate the sting, call your fund to find out its ex-dividend date--that is, when the fund declares dividends--and the likely size of the distribution. To the extent that the distribution will include dividends and short-term gains, you will benefit by selling your shares before the ex date. If you've held the shares more than a year, you pay no more than 20% tax. If you held on to the shares and received the dividends and gains, you could pay as much as 39.6% on those short-term profits.

Top-Performing Bond Funds: 1 Year

Investment-grade BBB-rated or better corporate bonds

                                               TOTAL RETURN
                                           TO SEPT. 21([dagger])
RANK/NAME                                 1 YEAR           3 YEARS

1. Vanguard Bond Index Long Term            16.8%            10.9%
2. Smith Barney Invest Grade A(@)          16.3             11.3
3. Lebenthal Taxable Muni Bond             15.6             11.1
4. Westcore Long Term Bond                 15.5             10.7
5. Crabbe Huson Income Primary             13.1              9.3
CATEGORY AVE,AGE                           8.0%             7.2%

                                          12-MO.           EXPENSE
RANK/NAME                                  YIELD            RATIO

1. Vanguard Bond Index Long Term            5.9%             0.2%
2. Smith Barney Invest Grade A(@)           5.3             1.11
3. Lebenthal Taxable Muni Bond              6.0             0.79
4. Westcore Long Term Bond                  5.4             0.95
5. Crabbe Huson Income Primary              7.9             0.80
CATEGORY AVERAGE                           5.7%             0.91%

                                         MINIMUM         MAX. SALES/
                                          INITIAL        REDEMPTION
RANK/NAME                               INVESTMENT           FEE

1. Vanguard Bond Index Long Term           $3,000            none
2. Smith Barney Invest Grade A(@)          1,000            4.50%
3. Lebenthal Taxable Muni Bond             1,000            4.50
4. Westcore Long Term Bond                 1,000            none
5. Crabbe Huson Income Primary             2,000            5.75
CATEGORY AVERAGE
                                           800
RANK/NAME                                 NUMBER

1. Vanguard Bond Index Long Term          635-1511
2. Smith Barney Invest Grade A(@)        544-7835
3. Lebenthal Taxable Muni Bond           221-5822
4. Westcore Long Term Bond               392-2673
5. Crabbe Huson Income Primary           541-9732
CATEGORY AVERAGE

High-yield Lower-rated corporate bonds

                                               TOTAL RETURN
                                            TO SEPT. 21([dagger])
RANK/NAME                                   1 YEAR          3 YEARS

1. Strong Short Term High Yield               7.7%            --
2. Idex Income Plus A(@)                      6.7             9.3%
3. Security High Yield A                      4.8             --
4. Columbia High yield                        4.8             9.6
5. Vanguard High yield  Corporate             4.5             9.1
CATEGORY AVERAGE                             -1.9%            8.0%

                                            12-MO.          EXPENSE
                                             YIELD           RATIO
RANK/NAME
1. Strong Short Term High Yield               7.4%           0.86%
2. Idex Income Plus A(@)                      6.1            1.27
3. Security High Yield A                      7.8            0.87
4. Columbia High yield                        7.9            1.00
5. Vanguard High yield  Corporate             8.8            0.28
CATEGORY AVERAGE                              9.1%           1.28%

                                         MINIMUM       MAX. SALES/
                                        INITIAL       REDEMPTION
RANK/NAME                              INVESTMENT          FEE

1. Strong Short Term High Yield          $2,500           none
2. Idex Income Plus A(@)                   500            4.75%
3. Security High Yield A                   100            4.75
4. Columbia High yield                    1,000           none
5. Vanguard High yield  Corporate         3,000         1.00(r)
CATEGORY AVERAGE

                                           800
RANK/NAME                                NUMBER

1. Strong Short Term High Yield         368-1030
2. Idex Income Plus A(@)                   (#)
3. Security High Yield A                888-2461
4. Columbia High yield                  547-1707
5. Vanguard High yield  Corporate       635-1511
CATEGORY AVERAGE

Tax-exempt Municipal bonds

                                              TOTAL RETURN
                                           TO SEPT. 21([dagger])
RANK/NAME                                1 YEAR          3 YEARS

1. CitiFunds National Tax Free            11.3%            9.1%
2. Eaton Vance High Yield Muni A          10.0            10.8
3. Heartland High Yield Muni               9.6              --
4. Eaton Vance National Muni A             9.6             9.6
5. Executive Insured Tax Exempt            9.6             8.7
CATEGORY AVERAGE                          7.0%             6.6%

                                         12-MO.           EXPENSE
RANK/NAME                                 YIELD            RATIO

1. CitiFunds National Tax Free            5.0%             0.80%
2. Eaton Vance High Yield Muni A           5.6             1.05
3. Heartland High Yield Muni               6.3             0.74
4. Eaton Vance National Muni A             5.3             0.78
5. Executive Insured Tax Exempt            4.3             1.22
CATEGORY AVERAGE                          4.4%             1.03%

                                         MINIMUM        MAX. SALES/
                                         INITIAL        REDEMPTION
RANK/NAME                              INVESTMENT           FEE

1. CitiFunds National Tax Free           $1,000            none
2. Eaton Vance High Yield Muni A          1,000            4.75%
3. Heartland High Yield Muni              1,000            none
4. Eaton Vance National Muni A            1,000            4.75
5. Executive Insured Tax Exempt           1,000            4.75
CATEGORY AVERAGE

                                           800
RANK/NAME                                NUMBER

1. CitiFunds National Tax Free          331-1792
2. Eaton Vance High Yield Muni A        225-6265
3. Heartland High Yield Muni            432-7856
4. Eaton Vance National Muni A          225-6265
5. Executive Insured Tax Exempt         423-4026
CATEGORY AVERAGE