2015 Conference

Mutual Funds, Tax Efficiency, Benchmarking, and data envelopement analysis

This study illustrates the use of data envelopment analysis (DEA) to benchmark mutual funds on their tax efficiency. This study benchmarks a mutual fund on the basis of risk-adjusted performance, tax-cost ratio, turnover ratio, and expense ratio so that investor can select best performing funds on a broader basis rather than just the performance. Using the DEA methodology, efficiency score for 35 funds on a scale of 1 to 100 is computed by maximizing twelve month total return and minimizing tax cost ratio, standard deviation, expense ratio, and turnover ratio. Furthermore, the study shows the areas in which tax inefficient mutual funds are lagging behind and how they can improve their performance to bring them at par with other tax efficient mutual funds.