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Published by: Allied Business Academies
Published in: "Journal of the International Academy for Case Studies", 2005
Length: 10 pages
Data source: Published sources

Abstract

This case introduces students to the tax issues related to a major player in the investment and retirement savings market - mutual funds. It also emphasizes the importance of considering after-tax rates of return in the investment decision. The case examines the interplay between tax rules and mutual fund rates of return by comparing pre- and post-tax rates of return for eleven common mutual funds over a two-year period, 1999 - 2000, which includes both bull and bear markets. The concept of tax clientele is introduced, for without a specific clientele, meaningful after-tax rates of return cannot be computed. Furthermore, basic differences in the taxation of capital gains and ordinary income as well as basic differences in the tax consequences of holding funds versus individual stock portfolios are examined. After completing this case students should be able to (1) calculate pre- and post-tax mutual fund returns; (2) rank funds based on a tax client’s tax rates and after-tax returns; (3) understand the long-term effect of taxes on mutual funds returns; (4) develop strategies to maximize the investor’s after-tax return; and (5) identify characteristics of tax-efficient funds. The case is appropriate for assignment in undergraduate accounting and finance classes as well as for an exercise in graduate classes studying tax strategy. Several possible teaching approaches can be used to present this case and to extend the basic requirements. In its simplest form, by covering just the basic requirements, the case is an introduction to mutual fund taxation and mutual funds in general. It also serves as an exercise to enhance spreadsheet skills. In a more advanced setting, the basic requirements in the case can be used to motivate class discussion of the conceptual issues related to tax clientele and the importance of comparing after-tax returns in investment choice.
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Abstract

This case introduces students to the tax issues related to a major player in the investment and retirement savings market - mutual funds. It also emphasizes the importance of considering after-tax rates of return in the investment decision. The case examines the interplay between tax rules and mutual fund rates of return by comparing pre- and post-tax rates of return for eleven common mutual funds over a two-year period, 1999 - 2000, which includes both bull and bear markets. The concept of tax clientele is introduced, for without a specific clientele, meaningful after-tax rates of return cannot be computed. Furthermore, basic differences in the taxation of capital gains and ordinary income as well as basic differences in the tax consequences of holding funds versus individual stock portfolios are examined. After completing this case students should be able to (1) calculate pre- and post-tax mutual fund returns; (2) rank funds based on a tax client’s tax rates and after-tax returns; (3) understand the long-term effect of taxes on mutual funds returns; (4) develop strategies to maximize the investor’s after-tax return; and (5) identify characteristics of tax-efficient funds. The case is appropriate for assignment in undergraduate accounting and finance classes as well as for an exercise in graduate classes studying tax strategy. Several possible teaching approaches can be used to present this case and to extend the basic requirements. In its simplest form, by covering just the basic requirements, the case is an introduction to mutual fund taxation and mutual funds in general. It also serves as an exercise to enhance spreadsheet skills. In a more advanced setting, the basic requirements in the case can be used to motivate class discussion of the conceptual issues related to tax clientele and the importance of comparing after-tax returns in investment choice.

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