Just days before the income tax filing deadline, here's one more reason to be bitter about taxes: They're pulling down your mutual fund investment returns.

Indeed, as if the bear market weren't bad enough, a recent Lipper study shows that:

• Holders of mutual funds in taxable accounts have given up at least 1.5 percentage points in returns because of taxes.

• As a result, shareholders are giving up, on average, more than 25 percent of their returns to government coffers.

• Despite the worst stock market since 1939-41, U.S. mutual fund investors in taxable accounts still paid Uncle Sam an estimated $8.6 billion in 2002.

Despite the overwhelming rise of 401(k) and IRA accounts, Lipper still estimates that around half of the $5.96 trillion in mutual funds are in taxable accounts.

That means holders of those funds are liable for capital gains within the account - even their personal holdings have declined.

Liable for good, bad

Federal regulations say a mutual fund doesn't pay its own capital gains taxes as long as it distributes that responsibility to all shareholders equally - regardless of their length of time in the fund.

Shareholders often find themselves liable for gains on stock holdings that pre-date their investment in the fund.

Say, for example, that you weren't invested to enjoy a mutual fund's fantastic gains during the 1990s bull market and you are only suffering in the bear market since 2000. You are still liable for gains on the fund's long-term holdings.

Lipper says that in 2002 U.S. mutual funds distributed their smallest capital gains since 1995.

Still, investors had to pay taxes to Uncle Sam, on top of losing an average of 21.2 percent in those funds.

After taxes, the average loss ballooned to 21.6 percent

Protecting yourself

But this Lipper study is not without recommendations.

Investors usually try to avoid capital gains by sticking with index funds. With little turnover in index funds, few capital gains result.

But over the last five years, the average index fund has outperformed the average tax-managed fund.

Tax-managed funds are another key way investors protect themselves against high taxes from funds.

Portfolio managers at these funds try to minimize taxable gains through certain strategies, such as tax loss harvesting and minimizing heavy turnover.

But Lipper points out that $25.6 billion of the $3.46 trillion in taxable accounts - just 0.8 percent - is in tax-managed funds.

That means that all fund managers should consider the consequences of taxes more carefully, because investors are not.

Most fund managers now are evaluated on performance and expenses. Investment company boards should also start evaluating its managers on tax efficiency, as well, Lipper says.

Contact Amy Higgins at 768-8373; ahiggins@enquirer.com; or 312 Elm St., Cincinnati 45202. She regrets that she cannot reply to all individual questions.