Mutual funds are a type of investment that is managed by a team of investment professionals. This means that you don’t have to do the work and research yourself.
Mutual funds offer many benefits to investors. They are diversified, which means they invest in a variety of assets, like stocks, bonds, and other types of securities. They also employ professional fund managers with years of experience who are trained to take on the risks involved in investing.
Investing in mutual funds is a widely popular method of saving for retirement. You can buy them from an investment advisor or exchange them directly on markets like the NASDAQ or NYSE.
A mutual fund is designed to minimize the investor’s taxes. Your tax advisor might recommend a mutual fund. Well-managed and tax-efficient investments are a great way to invest outside of an account that has been established. Low liability taxes make these types of investments stand out in any market downturn.
The best way to reduce your fund’s tax liability is by purchasing low-taxed investments. You can do this in multiple ways. For example, municipal bonds are considered tax-free; or keeping the fund turnover low and avoiding income-generating assets like stocks that might generate short-term capital gains.
Here are seven tax-efficient mutual funds for your portfolio:
- T. Rowe Price Tax-Efficient Equity Fund (NASDAQ:PREFX)
- Vanguard Tax-Managed Capital Appreciation (NASDAQ:VTCLX)
- T. Rowe Price Tax-Free Income Fund (NASDAQ:PRTAX)
- Vanguard Tax-Managed Balanced (NASDAQ:VTMFX)
- Vanguard Tax-Managed Small-Cap (NASDAQ:VTMSX)
- Fidelity Intermediate Municipal Income Fund (NASDAQ:FLTMX)
- Vanguard Intermediate-Term Tax-Exempt Fund (NASDAQ:VWITX)
Mutual Funds to Buy: T. Rowe Price Tax-Efficient Equity Fund (PREFX)
This fund seeks to provide returns that are both tax-efficient and diverse. It invests in a range of stocks, including those with promising futures, as well as large companies operating in dynamic industries, such as finance or technology.
The T Rowe Price Tax-Efficient Equity Fund pursues significant long-term investments while seeking to reduce burden taxes by investing broadly into mid- and small-cap sectors. The fund targets investments in high-quality companies whose management teams and product lines are strong, as well as a powerful balance sheet.
To stay ahead of the competition, the fund has adopted a strategy to avoid realizing capital gains by not practicing sector rotation and selling off their existing holdings. Their strategy intends to maintain strong after-tax returns.
However, generally, net taxable income can be realized to satisfy redemption requests or when it is in the best interest of investors. For their taxes, fund managers may offset realized losses from securities that are not profitable by using planned gains.
Vanguard Tax-Managed Capital Appreciation (VTCLX)
This investment seeks to provide a tax-efficient investment return in the form of long-term capital appreciation, which comes in the form of lower dividends. This fund will invest in stocks that are included on the Russell 1000 Index. The index is comprised of stocks from large companies that pay low dividends.
Analyzing the index using statistical methods by randomly sampling it to minimize dividend taxes is a common first step for advisers. This fund is no different. The goal of this strategy is to generate the majority of the returns by mimicking the performance of an index, all while reducing your taxable income.
Vanguard has been providing investors with low-cost index products since its inception. Vanguard offers an investment service that aims to be different by compounding your investment returns. You know you’re in good hands with them.
The investment fund can be a part of a portfolio for people in a higher tax bracket who have a long-term outlook. It may not be the smartest idea for someone with a short-term horizon.
Donald Butler and William Coleman, Managing Directors of Vanguard’s Prime Money Market Funds, manage the fund. They are already two of the most experienced fund managers in their industry, having managed other funds for Vanguard.
The fund has produced impressive returns over the past 12 months, coming in at 8.33%. Looking back further reveals more growth, with the fund going up to 26.43% in three years, 18.65% in five years, and 16.73% after ten years of investing.
Mutual Funds to Buy: T Rowe Price Tax-Free Income Fund (PRTAX)
This fund actively invests in municipal bonds and seeks to generate high-income levels without incurring federal tax liabilities. It normally has assets that mature at or beyond 15 years. This investment fund tracks the Bloomberg Municipal TR USD Index and has a weighting of 100%.
The fund invests in securities that are exempt from federal taxes. Generally, 80% of their income is not taxable and leaves you with a windfall. The fund usually invests in long-term municipal securities. But it will invest in any security of their choosing.
Capital is allocated mostly in investment-grade securities, which are ranked highly by one or more major credit rating agencies and deemed equally good by T. Rowe Price.
Konstantine Mallas has been managing the PRTAX Fund since 2007. It has an expense ratio that is lower than most funds in its category at 0.53%.
PRTAX has been around for 50 years and has a 4.96% gain over the past three years and a 4.13% increase in the past five. Overall, it is a good fund.
Vanguard Tax-Managed Balanced (VTMFX)
This fund is a great way to get stock market exposure without the risk of large-capitalization stocks. The mid- and larger-sized companies in America make up about 50% each, while municipal bonds provide additional protection for your money with tax exemption benefits.
Some investors may seek a haven for their money when the stock market is unpredictable and risky. These investors could consider this fund, which has lower taxes on capital gains and less volatility than traditional stocks or bonds because it invests with a focus on tax efficiency.
As with all Vanguard funds, experienced hands are at the helm. Since 2013, James D’Arcy has managed the fund without any changes. Since then, he has been in charge of the fund and won’t be giving it up anytime soon. Two veteran Vanguard employees have joined him to help manage and run the firm: William Coleman and Walter Nejman.
As of Jan. 21, 2022, assets totaling almost $8.82 billion were invested in 3,440 different holdings. The Vanguard mutual fund company launched in September of 1994. It has an annual expense ratio of 0.09%.
If you want to manage your tax issues, adding a fund to a portfolio that uses a balanced approach, such as this one, could be a good fit for you. Over the past year, the fund has returned 13.10%. Over the past three years, it has seen an average of 14.78% return and 10.92% over five years.
Mutual Funds to Buy: Vanguard Tax-Managed Small-Cap (VTMSX)
This fund invests in companies that strive to provide returns on investment and long-term capital appreciation. When buying a mutual fund, it is important to look at the investments that it holds. This fund tracks the S&P SmallCap 600 Index. It consists of smaller U.S. companies, which may be an appealing option for investors looking for a little more growth potential.
The fund may choose to reduce investments in index securities with unfavorable tax qualities and keep securities no longer included in the index. The fund has been a steady performer over the past year, returning 27.08%. It also showed good growth over the past three years with 20.27% returns. During the past decade, the fund has returned 14.44%.
However, its performance lags behind other funds that are more consistent at generating income for investors, while still providing strong gains when they’re hot.
Vanguard Tax-Managed Small-Cap Fund offers a low-cost fund with an Expense Ratio of just 0.09%. Top holdings include Omnicell (NASDAQ:OMCL), AMN Healthcare Services (NYSE:AMN), UFP Industries (NASDAQ:UFPI), and Chart Industries (NYSE:GTLS).
Fidelity Intermediate Municipal Income Fund (FLTMX)
This fund is trying to put as many bonds that don’t pay federal taxes in the portfolio. They’re all issued by different authorities for different projects. For example, state and county governments issue them to fund infrastructure-related projects.
These municipal bonds have all the traits good managers look for: they’re high-quality and attractively priced. They bought them last spring, summer, and fall when prices were low. Since the fund opened its doors, it has achieved average returns with low volatility. Fidelity Advisor Municipal Income remains consistent despite lagging behind its peers.
The municipal bond universe is quite broad and the funds capture almost every corner of it. The fund has a range of categories in which it invests, such as revenue bonds, utility bonds, transportation bonds, and more. The average credit quality is A.A., and about 90% of its bonds have ratings A or better.
There have been some ups and downs in the past. But this fund is cautious and withstood most of its peers during the recent downturn. Its returns have been steady, and it’s easy to track its performance. And even if its performance isn’t top-notch now, it can still provide a stable return over time.
Investors in this fund haven’t seen much volatility from its rivals, with the returns being relatively higher. Its competitors have provided more thrill but are not always reliable, while this fund has been steady throughout.
You will get an annual return of 1.14%. The return was 4.05% over the past three years and 3.56% over the past five years with an expense ratio of 0.34%.
Mutual Funds to Buy: Vanguard Intermediate-Term Tax-Exempt Fund (VWITX)
This fund’s goal is to provide moderate and sustainable tax-advantaged income. At least 75% of the securities are rated in the top three credit-rating categories by a nationally recognized statistical ratings organization or approved by an advisory committee.
The fund can invest up to 20% of its assets in medium-grade bonds as the advisor deems appropriate. The fund can invest 5% of your investment in less secure assets. The expense ratio is 0.17%.
An investor knows that an investment fund is exposed to different risks. Though the fund has certain protections to reduce those risks, changes in interest rates can affect the value of bonds, making income less predictable. Investors looking for a fund that provides federally tax-exempt interest income that is moderately priced and can handle fluctuations in investor performance may consider this fund.
On the publication date, Faizan Farooque did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.