Making decisions about when to buy and sell can be hard enough when you're managing your mutual fund portfolio, but smart investors consider tax implications, too.

If you're new to investing and you bought a mutual fund in the last year, you might have been surprised to receive a tax bill in the form of a 1099-DIV -- a statement outlining earnings from dividends and capital gains distributions.

If your fund distributes capital gains, you'll get a 1099 even if you didn't sell any shares or if your investment lost money. That's because they're generated by the actions of the fund manager, not the individual investor. When a portfolio manager sells securities at a profit during the year, it creates a gain which the fund is required to distribute to shareholders annually.

"It's a sad fact, but mutual fund investors really get a raw deal when it comes to taxes," said Sonya Morris, an analyst with fund-tracker Morningstar Inc. "If you're an individual stock investor you have control, you decide when to buy and when to sell. But the tax implications of the mutual fund have to do with when the manager decided to buy and sell. It's their timing decisions that impact your tax bill."

How much you'll owe depends on how long the manager held the shares sold at a profit; short-term capital gains, assessed on investments held for less than a year, are taxed at a significantly higher rate than long-term capital gains.

There's not much you can do about last year's taxes. But the arrival of the 1099s might spur you to take tax-savvy measures in 2006.

You won't be sorry if you do; Douglas Rogers, author of "Tax Aware Investment Management," says being astute about taxes can boost your total return anywhere from 0.5 percent to 1.5 percent a year, depending on your portfolio. This might not have resonated with investors during the go-go years of the 1990s, but in the current environment, careful tax planning can have a huge impact.

"For someone young, just coming out of college, this can mean the difference between retiring at 65 or 60 versus maybe retiring at 75. So for the smaller investor, it's absolutely critical," said Mr. Rogers, a managing director and senior consultant at CTC Consulting Inc., a subsidiary of U.S. Trust Corp. "In my work, I have to give market forecasts all the time, but can I control what the market will do? No. Taxes are the one thing investors can control. Seek out the right products, build the right structure ... it's relatively simple. You do not have to be a CPA or an estate attorney to figure this out."

One easy thing mutual fund investors can do to protect themselves is to be careful about when they buy. Funds usually distribute capital gains at the end of the year, which means if you buy shares in November, and the fund pays a distribution in December, you'll owe taxes for the entire year even though you've only owned the fund for a month. Most fund providers will announce the amounts and dates of capital gains distributions, so be alert when you buy.

Another strategy is to be thoughtful about where you hold your investments. If a fund you really like issues a big distribution, moving it to a tax-deferred account such as an IRA or a 401(k) could save you money. Be aware that investments that throw off lots of interest, such as REITs, REIT funds and fixed income funds, tend to generate higher tax bills, making them better-suited to tax-deferred accounts.

You can also be proactive about tax management when selecting the funds you plan to hold outside your tax-deferred accounts. Tax-free municipal bond funds are a good way to introduce a fixed-income element. Bargain hunters have long admired index funds and exchange-traded funds for their low expenses and tax-efficient structures.

When selecting actively managed funds, look for lower turnover rates -- meaning those that hold stocks for longer periods. This is a common feature of portfolios run with long-term time horizons, (something individual investors should like anyway) and it has the happy byproduct of limiting taxes. And be sure to check out the fund's performance after taxes are taken into account; you can find tax-adjusted returns on the prospectus or on Morningstar's Web site.

Another window into a fund's tax efficiency is whether the managers who run it are among your fellow shareholders. Managers who "eat their own cooking" tend to be more tax-conscious, said Morris, of Morningstar, because it's their tax bill, too. Finding this out might require some research; some managers are really up front about it, but it's not always apparent.

Ultimately, there's a limit to how much you can control your tax bill when you own mutual funds. One way to take full command is to dump your funds altogether in favor of a self-directed portfolio of stocks, like those offered by brokerage firm Folio fn. For investors willing and sophisticated enough to build their own portfolios, this can be a cost-effective way to achieve mutual fund-like diversity, while maintaining ownership of individual stocks and the ability to harvest tax losses, said Folio fn chief executive and founder Steven Wallman.

"There can be significant capital gains distributions from a fund, even when it has performed poorly," said Mr. Wallman, who served on the Securities and Exchange Commission from 1994-97. "You can actually buy into a fund, lose money and still get a capital gains distribution, none of which is enjoyable. Those problems can be solved by other vehicles, like Folios, where you own the underlying security."

A separate issue is the tax bill you'll generate by selling shares of your mutual fund. You can limit this, of course, by holding them for longer than a year -- if you don't you could wind up owing short-term capital gains, and have no one to blame but yourself.