Tax-advantaged mutual funds

Tax-advantaged mutual funds are funds whose investment holdings are designed to minimize the investor’s tax liability. They may or may not be tax-managed, but their approach tends to be tax-efficient over time, resulting in overall lower tax payments by investors.
Index funds are the premier form of tax-advantaged investment. Index funds feature a passive style of investing, in which the fund manager buys and sells stocks only as needed to ensure that the fund continues to mirror the index on which it’s modeled. Because the manager of an index fund doesn’t do a lot of trading, relatively low amounts of capital gains are realized during any given year, minimizing the tax bite you must pay. Perhaps the most tax-efficient fund type available today is an index fund that is specifically managed to minimize capital gains distributions. This involves certain accounting practices that the fund manager must be careful to follow, including identifying for the Internal Revenue Service the bought and sold specific shares of a given company. By selling first all shares bought at a higher price and holding on to those bought at a lower price, a fund manager can reduce taxable distributions to investors significantly. If you’re interested in a tax-advantaged mutual fund, contact Charles Schwab and Vanguard. These two mutual fund companies are among those that offer tax-efficient index funds specifically designed to keep capital gains taxes as low as possible.