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 use Morningstar.com's Premium Fund Screener to get a list of tax-friendly funds. (This tool is available to Morningstar.com Premium Members only, but nonmembers can sign up for a free trial.)
Once on Morningstar.com's Premium Fund Screener, follow these steps to set 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 Return Without 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 menu in 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" and select "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.
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