DEFINITION of 'Tax-Efficient Fund'

A mutual fund in which structure and operations are based on reducing the tax liability that its shareholders face. Reducing the tax liability of a fund is done in three main ways:

1. By purchasing tax-free (or low taxed) investments such as municipal bonds.
2. Keeping the fund's turnover low, especially if the fund invests in stock. Stocks held for more than one year are taxed at a lower long-term capital gains rate than short-term transactions.
3. Avoiding or limiting income-generating assets, such as dividend-paying stocks, which create a tax liability at each dividend issuance.

BREAKING DOWN 'Tax-Efficient Fund'

Because tax-efficient funds have a low tax liability, they are often good investments to make outside of a tax-deferred account. This is because there is a minimal amount of tax to be deferred and the space in an investor's tax-deferred account is better suited for higher taxed securities, such as dividend-paying stocks.

To determine how much you will save in this type of fund compared to other funds, review the investment company's and/or mutual fund's tracking services for statistics regarding a fund's historic tax costs.

RELATED TERMS
  1. Tax Efficiency

    An attempt to minimize tax liability when given many different ...
  2. Tax Liability

    The total amount of tax that an entity is legally obligated to ...
  3. Tax Break

    A tax break is a savings on a taxpayer's liability. A tax break ...
  4. Nontaxable Dividends

    Dividends from a mutual fund or some other regulated investment ...
  5. Tax Base

    The assessed value of a set of assets, investments or income ...
  6. Net Of Tax

    An accounting figure that has been adjusted for the effects of ...
Related Articles
  1. Investing

    How Mutual Funds Are Taxed in the U.S.

    A look at how mutual funds are taxed and how investors can be more tax efficient.
  2. Investing

    How Tax-Efficient Is Your Mutual Fund?

    Learn about factors that influence the tax-efficiency of your mutual fund, how income from your investment is taxed and what to look for when choosing a fund.
  3. Financial Advisor

    Tax-Efficient Investing: Keep More Earned Money

    You can improve investment returns by applying year-round strategies to minimize your tax burden. Here are a few tips.
  4. Taxes

    What is a Tax Liability?

    Tax liability is the amount of money a person or entity owes to the government as the result of a taxable event.
  5. Financial Advisor

    How to Dodge Big Tax Hits on Your Portfolio

    An investment plan that helps clients minimize related tax hits adds even more value to an already well-thought out strategy. Here are some tips.
  6. Managing Wealth

    A Beginner’s Guide To Tax-Efficient Investing

    Tax-efficiency is a measure of how much of an investment’s return remains after taxes are paid.
  7. Financial Advisor

    Tax Efficient Strategies for Mutual Funds

    Before you sell mutual fund shares, consider these tax strategies first.
  8. Taxes

    Deferred Tax Liability

    Deferred tax liability is a tax that has been assessed or is due for the current period, but has not yet been paid. The deferral arises because of timing differences between the accrual of the ...
  9. Taxes

    Tax Haven Vs. Tax Shelters: Is There a Difference?

    Learn about the difference between tax havens and tax shelters, and how both are used to reduce tax liability or avoid paying taxes altogether.
  10. Taxes

    7 Ways to Create a Tax-Efficient Portfolio

    Taxes may be a necessary evil, but that doesn't mean they can't be reduced. Here's a host of smart moves today's investors can make.
RELATED FAQS
  1. How can I find tax-exempt mutual funds?

    Learn about finding tax-free mutual funds at major investment firms, including how tax-free funds work and what you should ... Read Answer >>
  2. Do tax liabilities appear in the financial statements?

    Find out how taxes are shown on the balance sheet, the income statement and the cash flow statement, and why taxes are an ... Read Answer >>
  3. Where do deferred tax liabilities come from?

    Learn about the basic features of deferred tax liabilities, how they originate and why a company might create deferred tax ... Read Answer >>
  4. What is the justification for allowing deferred tax liabilities?

    Understand the justification for allowing deferred tax liabilities. Learn the reasoning behind why a company would want to ... Read Answer >>
  5. What are some ways to minimize tax liability?

    Learn what tax strategies are available to individuals and business owners that may allow for a reduction in tax liability ... Read Answer >>
  6. Can mutual funds only hold stocks?

    Learn about which types of mutual funds consist of only stocks, which may include stocks in addition to other assets and ... Read Answer >>
Hot Definitions
  1. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  2. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  3. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  4. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Four Percent Rule

    A rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. The four percent rule ...
Trading Center