The stupid investment that raises your taxes. By Henry�Blodget

"Taxes You Shouldn't Pay
How your mutual funds are raising your IRS bill.
By Henry Blodget
Posted Thursday, April 13, 2006, at 11:56 AM ET


Own a mutual fund? If so, a couple of months ago, you probably got a note like this:
Dear Fund Owner: We are pleased to report that your fund did well in 2005. Thanks to the tireless efforts of our analysts, traders, and portfolio managers, we beat the market �
Well, actually, you probably didn't get a note like that, because most funds lag the market, but you probably got one trumpeting some fund feat or other. What you almost certainly didn't get was a note like this:
Dear Fund Owner: We are sorry to report that your fund did poorly in 2005. Oh, we beat the market, but of course this performance was pretax. We would like to imply that pretax performance matters (everyone else does), but it doesn't. Most of our shareholders have to pay taxes, and after taxes, our fund probably cost you a pretty penny.
It's no mystery why you don't get notes like this, even though they describe the reality for most fund owners (except for the market-beating part). Unless you own your fund in a tax-free retirement account, however (which some investors do�thus providing fund managers with an excuse), reading about pretax performance is a self-deluding waste of time. Instead, skip to the after-tax punch line, which, sadly, you probably won't find in the annual letter. Because if you don't, you'll just be setting yourself up to get socked with an unexpected tax bill.
Like other investing costs�management fees, brokerage commissions, transaction costs, etc.�taxes have a big impact on investment returns. A 2000 study by First Quadrant L.P. confirmed the familiar finding that index funds outperform most mutual funds"