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  • msf November 2013
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Looking for articles on Mutual Funds that are TAX EFFICIENT !

edited November 2013 in Fund Discussions
Morningstar and Lipper give information on tax efficiency for searching on individual funds. But I would like to see a rating site that lists groups of funds rated side by side showing how they compare. It is disappointing when a fund does well but finally taxes take a big bite out of the fund producing a mediocre tax adjusted return.


  • I see by the hands on the clock (or the page on the calendar) - it's that time of year again - capital gains season.

    Try as I might, I couldn't find a video, but what sticks in my mind is Jim Lebenthal's admonition: "It's not how much you earn that counts, it's how much you keep." I would add, it's not how much you pay in taxes, but how much you keep.

    Words to keep in mind when talking about tax efficiency. Take two share classes of the same fund - the one that has the lower expenses (e.g. Vanguard Admiral as opposed to Vanguard Investor), will be less tax efficient. USA Today just had an article (linked to in another thread) lamenting that $10K invested in Fidelity Contra lost $1,159 to taxes over the past ten years. It suggested using a fund like Vanguard Tax-Managed Cap Ap (VTCLX). It also said that the after-tax returns (over ten years) were 9.8% (annualized) for FCNTX, and just 7.89% for VTCLX, without seeing any irony. The most tax efficient fund is one that earns you no money.

    As to getting lists of funds with tax data, here's a M* Fund Spy article explaining its tax cost ratio figure (including formulas) and how to coax that information from its premium fund screener. You can also use M*'s free fund compare tool to build your own list - add whatever funds you want, and when you show the comparison of funds, go to the Risk & Tax Data view. This gives you the 3, 5, and 10 year tax cost ratios for all the funds you included.

    Some things to keep in mind about tax calculations - they're usually based on the highest tax rates; it's rarely obvious whether calculations for previous years were done based on tax rates in effect those years or by applying today's rates retroactively.

    Finally, outside of data found in prospectuses, one rarely sees the effect of all the tax liabilities - including the cap gains tax due when the shares are sold. Funds that don't recognize gains will cost you a pretty penny (in long term cap gains tax) when you cash out, because the shares will have appreciated so much. If you sell in less than a few years, there's little value in not recognizing the cap gains as you go along (i.e. tax efficiency achieved this way doesn't make a big impact on net gains after sale and taxes).

    All of this is a long winded way of saying be careful what you ask for. You may get numbers to compare, but those numbers may not accurately reflect how tax-efficient these funds are for you.
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