The tax advantage an SMA offers over a mutual fund is that ______

A. it can take into account the specific tax needs of the investor.
B. dividends are re-invested and not paid out to the investor.
C. no taxable capital gains are ever realized.

Correct Answer: A

Another tax benefit is the lack of embedded capital gains. Mutual funds must pay out all capital gains once per year. Since mutual funds are "mutual," all investors share the tax liability on the gains. So, for example, if the fund doubled in value from January through November, investors purchasing into the fund in December did not get the benefit of any of those gains, but they do inherit the tax liability because the gains are embedded in the portfolio. Separate account investors, thanks to an individual cost basis on the underlying securities, would not be liable for capital gains generated prior to the day they invested in the portfolio.