Investment asset allocation in response to tax relief for mutual funds: The case of South Korea

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This study examines whether the management style of a fund differs depending on the type of fund being managed for tax purposes, given the rules of temporary tax relief for fund investments. The study considers a change in the ratio of tax-favored assets to the net asset value of a tax relief qualified fund around the effective date of tax relief laws in South Korea in 2007 and 2016. A regression model is used to test sample data from domestic and overseas equity funds available in the three months before and after the 2007 and 2016 Restriction of Special Taxation Act came into effect. It was found that the ratio of the value of tax-favored assets to the net asset value in the tax relief qualified fund increased significantly since the enactment of tax relief laws in both 2007 and 2016. These findings suggest that fund managers may try to change the asset allocation in a managed fund to increase the after-tax return of the fund investor, which means that fund managers do take into account the potential tax burden on fund investors and try to minimize it.

Acknowledgment
This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF- 2019S1A5A8035027).

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    • Table 1. Comparison of RSTA 2007 and RSTA 2016
    • Table 2. The benchmark rate of return
    • Table 3. Size of sample funds
    • Table 4. Descriptive statistics of major variables for RSTA 2007 and 2016
    • Table 5. t-test results for overseas equity and domestic fund
    • Table 6. Regression results: RSTA 2007
    • Table 7. Regression results: RSTA 2016
    • Conceptualization
      Hyeongtae Cho
    • Data curation
      Hyeongtae Cho
    • Formal Analysis
      Hyeongtae Cho
    • Investigation
      Hyeongtae Cho
    • Resources
      Hyeongtae Cho
    • Software
      Hyeongtae Cho
    • Writing – original draft
      Hyeongtae Cho
    • Methodology
      SungMan Yoon
    • Project administration
      SungMan Yoon
    • Supervision
      SungMan Yoon
    • Validation
      SungMan Yoon
    • Visualization
      SungMan Yoon
    • Writing – review & editing
      SungMan Yoon