There oughta be a law: telling consumers the truth could save them money.(Your Money)(Column)

Ignorance is bliss" has long struck us as a dubious bit of wisdom. When companies keep their customers in the dark about key terms and conditions of their products and services, a lack of knowledge can be downright expensive. Following up on suggestions from our readers, I we focus on three areas where business may need to be prodded to level with consumers.

TAXES ON GAINS YOU DON'T GET

If you are a mutual-fund investor, you know you have to pay capital-gains taxes on profits you collect when you sell fund shares. You'll also get a tax bill for the dividends you receive each year you hold the fund. But few of the nearly 84 million Americans who invest in mutual funds understand--until it's too late--that their returns are diminished by another big tax wallop. When the fund sells individual stocks within its portfolio and realizes gains, guess who pays the taxes on those profits?

An analysis by KPMG Peat Marwick found that the average stock fund's returns drop by 2.5 percent annually after taking such taxes into account, though you won't see that reflected in fund-company ads. (Taxes are deferred, of course, if your fund is in an individual retirement account, a 401k, or some other tax-protected plan.) In some cases the tax bills wipe out the returns altogether. Consider the Eastcliff Growth fund. Its before-tax, three-year return as of December 31, 2000, was 13.52 percent. After taxes, however, the fund's return was 1.57 percent. More galling, shareholders can wind up with punishing taxes from stock trades, even though their fund lost money overall.

What's needed: Fund companies should disclose after-tax returns so investors can make meaningful performance comparisons. In January, the Securities and Exchange Commission (SEC) adopted a rule that requires mutual-fund companies to display after-tax returns for one-, five-, and ten-year periods prominently in prospectuses.

While it's a decent first step, the SEC should require fund companies to inform shareholders how much in realized gains and income awaits distribution--before they occur. Such information would allow investors to escape, by bailing out of the fund, before the tax ax falls at year-end. What's more, the SEC should require fund advertisements to disclose both pre- and after-tax returns.

Meanwhile ... Before investing in a fund, compare its "tax efficiency" (after-tax return) with that of its competitors--information you can find by consulting Morningstar, the Chicago mutual-fund rating service. (Its data are available at most large libraries or online at www.morningstar.com.) Morning-star considers a fund to be highly tax-efficient if its after-tax returns equal at least 94 percent of pretax returns.