Tax-efficient funds

Tax-Efficient Fund

A mutual fund that invests in securities thought to give fund shareholders the least possible tax liability. Common securities in which a tax-efficient fund invests are municipal bonds, which are usually tax-free, and non-dividend paying stocks, which reduce a shareholder's capital gains tax liability. Tax-efficient funds often retain stocks in which they invest, as stocks held for more than a year are taxed at a lower capital gains rate. They are often thought of as an alternative to tax-deferred investment vehicles, such as 401(k)s and IRAs.

Tax-efficient funds.

When a mutual fund minimizes the income earnings and capital gains it distributes to its shareholders, it may be described as a tax-efficient fund.

In general, the smaller a fund's turnover, or the less buying and selling it does, the more tax-efficient it has the potential to be. That's one reason why index funds, which buy and sell investments only when the composition of the index they track changes, are generally tax-efficient.

In addition to reducing turnover, actively managed funds may increase tax efficiency by emphasizing investments expected to grow in value over those that produce current taxable income, or yield. And they may postpone the sale of certain investments until they qualify as long-term capital gains, making them subject to a lower tax rate.

Funds that emphasize tax efficiency generally include that goal in their statement of investment objectives.

References in periodicals archive ?
In addition, the firm's Dalton Advisors division offers institutional and private clients investment strategies using low-cost, tax-efficient funds to structure customized portfolios in separately managed accounts.
Tax-efficient funds aim to minimize the distributions that are made to shareholders, thereby limiting the amount of income that must be declared.
Tax-efficient funds: Tax-efficient funds (such as index funds) are excellent long-term savings vehicles due to their low turnover, which reduces capital gains distributed over the investment's life.
Appropriate solutions for HNW individuals and small-business clients will be driven by asset allocation, risk management, consolidated statements and some alternative investment classes such as real estate and tax-efficient funds.
After completing this case students should be able to (1) calculate pre- and post-tax mutual fund returns; (2) rank funds based on a tax client's tax rates and after-tax returns; (3) understand the long-term effect of taxes on mutual funds returns; (4) develop strategies to maximize the investor's after-tax return; and (5) identify characteristics of tax-efficient funds.
This makes the mote tax-efficient funds the most appealing.
Investors may be able to reduce their tax bill and increase their after-tax return by investing in tax-exempt funds, such as municipal bond funds, in their taxable accounts, or consider investing in tax-efficient funds, such as index and tax-managed funds.
Dalton Advisors' investment strategy uses low-cost, tax-efficient funds to structure customized portfolios in separately managed accounts.
Consider tax-efficient funds that feature low turnover and low realized gains, including index and tax-managed funds.