Professionally Managed Portfolios and Mutual Funds

Advantages and Disadvantages for Physician Investors

[By Staff Writers]

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The following briefly summarizes the advantages and disadvantages of professionally managed portfolios and mutual funds according to size and taxation factors.

Portfolio Size

A major factor that impacts the selection process is the size of the physician-investor’s portfolio. For example, is there a size at which it makes more sense to use managed portfolios?

Except for large portfolios [>$3 – 5 million dollars, USD], mutual fund portfolios can meet most physician investors’ needs. Investors who need substantial individual attention should also consider managed portfolios (perhaps in conjunction with funds or ETFs to add additional asset classes).

Income Tax Consideration

Professionally managed portfolios often offer the physician greater control over the timing of taxable transactions.

For example, at the end of the tax year, it may be appropriate to defer capital gains that would otherwise incur, or conversely, the doctor may wish to accelerate recognition of capital losses.

Mutual funds do not allow physicians or other individual investors to influence the timing of these types of transactions. On the other hand, private portfolio managers are often sensitive to a client’s specific income tax planning needs.

In addition, mutual funds are required to distribute 95% of capital gains recognized during the year. These gains are taxable to shareholders of record on the date of the capital gains distribution, even if the shareholder did not benefit from the gains.

For example, a doctor-shareholder who invests in a mutual fund near the end of the year may pay taxes on gains that were incurred earlier in the year when the fund manager was required to sell securities to raise cash for the purpose of redeeming shares of other investors.




The problem is accentuated in long-term bull markets, where the recognized gains in one year result from an income tax basis to the fund that was established in past years, when the find manager bought securities at very low prices. Private portfolios have the advantage that clients normally are not penalized for events that occurred before they invested with a portfolio manager.

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