... and Taxes Can Make It Worse

Performance isn't the only factor to bear in mind before rushing the doors of a fund that's about to close. The tax efficiency of closed funds may slump, too. Unlike the drop in performance, however, declining tax efficiency is attributable to the closing itself. While inflows can make trading more difficult, they have a positive effect on tax efficiency. They reduce the tax burden on all shareholders because there are more shareholders to distribute capital gains across. It's worth noting, though, that tax considerations have played a part in some companies' decision-making process on closing funds.

Some officials say that the negative tax consequences of closing outweigh the pluses. Rather than close funds, they have added more managers.