tax-efficient fund

Tax-Efficient Fund

A mutual fund that invests in securities thought to give fund shareholders the least possible tax liability. Common securities in which a tax-efficient 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-efficient funds often retain 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.

tax-efficient fund

A mutual fund that manages its investment portfolio so as to minimize the tax liability of its shareholders. A tax-efficient fund attempts to minimize capital gains distributions by reducing portfolio turnover and to minimize dividend payments to shareholders by concentrating on investments in companies with low dividend payouts.