A
mutual fund that
invests in
securities thought to have given fund
shareholders the least possible
tax liability. Common securities in which a tax-managed 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-managed funds often hold on to 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.