Course 206: The Best Investments for Taxable Accounts
Tax-Managed Mutual Funds
In this course
1 Introduction
2 Very Low Turnover Stock Funds
3 Tax-Managed Mutual Funds
4 Municipal Bonds or Municipal-Bond Funds
5 Individual Stocks
6 Exchange-Traded Funds
7 Variable Annuities
8 Other Ideas for Tax Relief

Tax-managed funds are dedicated to limiting shareholders' tax burdens. They use a variety of strategies--not just one--to minimize taxes. For starters, they avoid dividend-paying stocks. They also strive to limit capital gains by holding their securities for a long time or by selling losing stocks to reduce their taxable gains.

Tax-conscious investors have a slew of these funds from which to choose. They can be hybrid funds that own both stocks and bonds, large-company funds, small-company funds, and foreign funds. In short, you could assemble a tax-friendly portfolio that invests in a variety of securities.

There are many fund-screening tools on the Web that can help. Here we useMorningstar.com's Premium Fund Screener to get a list of tax-friendly funds. (This toolis available to Morningstar.com Premium Members only, but nonmembers cansign up for a free trial.)

Once on Morningstar.com's Premium Fund Screener, follow these steps toset a screen to help you uncover inexpensive, tax-friendly funds with experienced managers:

  • Under the "Select Data to Screen on" drop-down menu, choose "AfterTax ReturnWithout Sale" under the Performance heading. In the pop-up window, select "5 Yr AfterTax Return(no sale) >= Category average." Hit OK.
  • Go back to "Select Data to Screen on" and choose "Tax Cost Ratio" under the Performance heading. Choose "5 Yr Tax Cost Ratio < Category average." Hit OK.
  • Go again to "Select Data to Screen on" and select "Management" under the Management and Purchase Data heading. Using the Data drop-down menuin the pop-up window, select "Fund Manager Tenure > Category average." Hit OK.
  • Return to the "Select Data to Screen on"menu, and choose "Fees & Expenses" under the Management and Purchase Data heading.Select "Expense Ratio < Category average." Hit OK.
  • Under "Select Data to Screen on," look under the Management and Purchase Data heading for"Closed to New Investment" andselect"Closed to New Investment = No" in the pop-up window. Hit OK.
  • Finally, go one last time to "Select Data to Screen on" and select "Distinct Portfolio Only" under the General heading. In the pop-up window, set this condition equal to "Yes." (This will filter out multiple share classes of the same fund in your results.) Hit OK.
  • Now hit "Click button to show results" and to view the funds that passed your screen.

Next: Municipal Bonds or Municipal-Bond Funds >>


Search
Print Lesson |Feedback
Del.icio.us Del.icio.us | Digg! digg it
Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.
Copyright 2010 Morningstar, Inc. All rights reserved. Please read our Privacy Policy.
If you have questions or comments please contact Morningstar.