Mutual Funds: Tax-Efficient Funds

The good news is that mutual fund you invested in posted huge returns for the past year. The bad news is the ides of April are on the horizon.

Yes, when a fund distributes its capital gains, shareholders have to report those gains as taxable income. These taxes can add up to take quite a bite out of those gains, especially if that hot fund you invested in trades stocks like hot potatoes. If a fund only holds stocks for short periods, meaning it has a high turnover rate, that frequent selling can boost taxes.

But, let's have some more good news. The ever-accommodating fund world has created an offering that addresses these taxing matters: the tax-efficient fund. Tax-efficient funds implement strategies that aim to minimize your tax bill, such as keeping turnover levels low or shying away from companies that provide dividends, which are regular payouts in cash or stock that are taxable in the year that you receive them. These funds still shoot for solid returns, they just want less of them showing up on your tax returns. ...