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Six Mutual Fund Tax Tips

Morningstar lists six ways you can make your mutual fund portfolio more tax efficient by minimizing your taxable fund distributions. Tax-efficient funds are those that make very few or relatively small taxable payments to shareholders; some funds try to keep trading activity low (minimizing realized gains which have to be distributed), some watch the way they buy and sell securities in an effort to minimize the tax burden to their shareholders.

  1. Invest in Tax-Managed Funds - The managers of tax managed funds take special care to keep taxable distributions to a minimum. They generally don't do much trading, and attempt to "sell losing stocks to offset winners elsewhere in the portfolio." Tax managed funds mentioned in the article: Vanguard Tax-Managed Growth & Income (VTGIX), Vanguard Tax-Managed Balanced (VTMFX), and Eaton Vance Tax-Mgd Value A (EATVX).
  2. Look for Closet Tax-Managed Funds - Many funds, such as Oakmark Fund (OAKMX) and Third Avenue Value Fund (TAVFX) don't officially call themselves tax efficient, but have managers that try to keep taxes low.
  3. Don't Forget about Index Funds - Index funds track indexes such as the S&P 500, and the people that decide which stocks are included in such indexes don't add or remove stocks from them very often. Because these funds tend to have low turnover, they are generally very tax efficient.
  4. Think about ETFs - Most ETFs track indexes, just like index funds do, and hence have low turnover. Low turnover usually equals high tax efficiency. In addition, ETFs unique structure minimizes taxable gains that have to be distributed to shareholders.
  5. Make Other Investors' Losses Your Gain - Mutual funds that have had particularly bad performance periods (think tech funds in 2002), can 'carry forward' those losses and offset gains for years to come. This is one we particularly like because it also means you are probably making a contrarian investment – investing where others have just lost money.
  6. Houseclean Your Own Portfolio - If you're planning on dumping a fund that has posted a loss, selling before December 31st will allow you to use the loss as a tax deduction on that year's taxes.


Of course, the most tax-efficient funds are the ones that stink when you own them, because they never distribute profits (there are none!) and often generate nice tax losses when you sell them.

See also:

Ask MAX: Capital Gains Quickies

How Mutual Funds Work - Capital Gains

S&P 500 Index Secrets Revealed

04/06/07 - Investing Tips

Despite challenges from new-fangled upstarts, the good old Standard & Poor's 500 Index still reigns as the king of the stock indexes. It's the basis for such mutual fund giants as Vanguard 500 Index Fund (VFINX) and Fidelity's Spartan 500 Index Fund (FSMKX), and in all more than $4 trillion in investors dollars is tracking it (some of which is probably yours). Marketwatch reveals some fascinating facts about the S&P 500 index that you might not know:

  • Some people see indexing as a static, sanitized investment strategy. To be sure, the S&P 500 represents about 75% of U.S. stocks by market value, but it's hardly monolithic. Just 86 of the original 500 companies are in the index today. The others were acquired, failed or dropped from the ranks.
  • The S&P 500's strength -- ranking stocks by market value -- can be a weakness. In runaway bull markets especially, the index can become a poster child for speculative excesses. When investors ignore valuation and bid shares of the biggest companies to stratospheric heights, the index can become dangerously unbalanced.
  • Today, about 18.5% of the S&P 500 is tied to technology and telecom stocks. That's second to financials, at 22% of the index's total value. Add the health-care sector, at 12%, and more than half of the index is represented.
  • In the bear market that persisted through most of 2002, index-fund investors found no shelter as the S&P 500 lost half its value.
  • To most investors, the S&P 500 is the stock market's apple pie, a uniquely American product. In fact, though the benchmark companies are U.S.-based, their customers are increasingly global. The S&P 500 has so much total international-sales exposure, your stock portfolio might not even need a separate international component for diversification.


Petite Prospectus?

04/02/07 - Investing Tips

Chuck Jaffe reports on the mutual fund industry's efforts to reduce the size of the distributed fund prospectus:

If you buy a computer, the "quick-start guide" helps you get the equipment up and running without forcing you to learn many of the fine points that may or may not be useful information some day.

The powers behind the mutual fund business want you to get the same kind of jump start when it comes to their products.

Paul Schott Stevens, president of the Investment Company Institute, the trade association for fund companies, called for big changes in fund disclosure this week, specifically suggesting that investors would be better served by ditching the traditional prospectus in favor of a jump-start user's manual, along with instructions on how to access the true prospectus on the Internet.

It's hardly a new idea, but there's one significant difference this time, namely that the Securities and Exchange Commission is receptive to the idea, and the fund industry powers are more anxious than ever to ease their paperwork burden."

We are, generally, in favor of the idea, assuming these slimmer documents contain the information investors need to make buy decisions. The data in a prospectus that is important to the vast majority of investors could fit on about a page and a half, and a standardized sheet that contains just these key points will make identifying quality funds easier. Could save a tree or two to boot.

The American Dream

Last year, we wrote on MAXfunds.com, “Now that home price appreciation is leveling off, the ugly side from the growth of no-and low-money-down lending should rear its head.” The main concern in the stock market today is just how far the current sub-prime loan fallout will spread into the economy. Our opinion? Pretty darn far.