Jury Still Out on Benefits of Tax-Managed Mutual Funds.

ARE you getting a taxable capital gain from your mutual fund for 1999, even though the fund paid a disappointing return?

Maybe you're thinking of switching to a tax-managed fund that promises to hold your taxes down. But most tax-management strategies don't amount to as much as you think. This is especially true if you're in the 28 percent tax bracket or less, or hold the fund for just a few years.

None of this matters for the funds that you own in retirement accounts. There, all gains are tax-deferred.

In non-retirement accounts, however, you're taxed on your share of two things: the income the fund earns (dividends and interest) and the fund's realized net capital gains. (A fund realizes gains by selling stocks that have gone up in price.)

Money managers who tax-manage their funds try to minimize your net capital gains. Here are the strategies they use -- only one of which appears to be truly effective.

* Salvage losses. A fund can subtract a capital loss from a capital gain. That eliminates the tax on the gain.

But any mutual-fund manager will sell the stocks that he or she thinks are losers. So what do tax-managed funds do differently? Chiefly, they sell stocks they really like but whose price is currently down.

Selling potentially good stocks may not be the best strategy from an investment point of view. "If your fund does a great job of salvaging losses, it might earn an extra one- or two-tenths of a percent per year," says financial planner Harold Evensky of Coral Gables, Fla. "So there's not a lot in it."

* Keep turnover low. "Turnover" is the percentage of your fund's portfolio that the manager sells every year, to replace with something else. In theory, the less your manager trades, the lower the taxable gains.

But research has shown that, for most funds, the turnover rate doesn't make much difference to the tax you pay.

The average fund turns over nearly 100 percent a year. To get tax savings, turnover has to drop to around 15 percent or less, Evensky says.

Some index funds and tax-managed funds fall below that line. Others don't.

* Buy stocks that pay little or no dividends -- say, growth stocks instead of utilities. But this isn't special to tax-managed funds. It's an investment decision that many managers make.

* Limit the taxes paid when a stock is sold. Here's the pay dirt -- the only strategy that saves a significant amount of taxes, Evensky says.

Within any holding of a particular stock, some of the shares were bought at lower prices and others at higher prices. A tax-aware manager first sells the shares bought at a higher price. That minimizes the taxable gain.

On average, this strategy nets investors in the middle tax brackets an extra 0.6 percent year, Eveasky says (and 0.8 percent in the highest bracket).

But any big, diversified fund can -- and should -- be managed this way, whether it advertises itself as tax-managed or not. A growing number of funds are paying attention to taxes when they sell, to keep their returns competitive.

Some critics say that tax-managed funds are storing up big trouble for themselves. Over time, they pile up unrealized gains. If the fund has to sell appreciated shares to meet redemptions, the remaining investors could owe a big tax.

In the worst case, that could happen. But why do fund investors sell? Usually, because the market falls. If shares had to be sold, tax-managers could sell the losers, meaning no tax.

According to Morningstar in Chicago, a mutual fund information firm, the 42 tax-managed funds it tracks netted 98 percent of their gains for investors, after tax. That's over the past three years.

By comparison, investors in the average U.S. diversified fund netted only 85 percent of the funds' gains.

But that assumes that investors' income is taxed in the highest bracket (39.9 percent for ordinary income and short-term gains). The difference is much smaller for people in the 28 percent bracket, and negligible in the 15 percent bracket.

The returns for the tax-managed funds may also be biased, because they generally own big-company stocks. Those are the very funds that have done the best in recent years.

Tax-management might work for top-bracket investors who hold their funds 10 years or more. Otherwise, the case hasn't been proved.

Syndicated columnist Jane Bryant Quinn Most Investors Know Little About Market

Most Investors Know Little Aboutt Market

More Americans than ever now invest in stocks or stock-owning mutual funds. So the fate of the market is becoming more central to our lives.

Jane Bryant Quinn

At the end of 1998 (the latest data from the Federal Reserve), nearly 50 percent of us were eagerly following the market, compared with 37 percent in 1992.

Most investors are still not financially literate, says planner Harold Evensky of Coral Gables, Fla. Typically, they know nothing about the companies they own: not the business plan, market share, rate of growth, operating earnings or competitive position.

It's hard to argue with someone who hit Qualcomm right (up 238 percent in 1999). But, Evensky asks, "Are you sophisticated, just because you can find E-Trade?"

Investors today also seem less interested in asset allocation, another hot mid-'90s strategy.

Allocators spread their money over several markets: big stocks, small stocks, international stocks and bonds.

Now, many investors incline toward concentrated portfolios. Since we "know" the winners in the New Economy, we might as well put more money there. But there are three things to keep in mind about owning individual stocks:

* Do you really know how well you've done? Too many investors remember their winners, blank Out their losers, never average them together, and hence have no idea whether they've beaten the market or not. To find out the truth, try tracking your personal performance through software from Quicken or Microsoft Money.

* Have you any idea how much risk you've taken on? By ratcheting ever more toward tech, you may be buying into a bubble. In recent market sessions, a lot of bubbles have been pricked.

* A diversified Portfolio will never do as well as the flashiest stocks. But it won't do as badly as the worst ones, either. The purpose of diversification is to spread your risk.