Source: Karen Hube, The Washington Post

"Investors typically don’t realize how many basis points of their returns can be shaved off because of tax inefficiencies,” says Davinder Malhotra, professor of finance at Philadelphia University, who recently completed a study that found funds with the highest expenses also have the biggest gaps between their pre- and after-tax returns. On average, mutual fund investors lose about 1.8 percentage points a year of their value to taxes, says Joel Dickson, the Vanguard Group’s senior investment strategist. In rising markets, the average tax hit rises to about 2.5 percent. Funds rack up a tax bill as their investments generate dividends and managers sell securities to lock in gains.

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