Index Funds:
Index funds are tied to a stock index,
such as the S&P
500. The costs of index funds are extremely low since they
closely mimic the index they represent, and are therefore
not actively managed. Stocks within the index funds are held
long term, and therefore the fund has a very low turnover.
Because of this the capital gains are kept to a minimum,
and the taxes are extremely low. These are very tax-efficient
funds.
Tax Managed Funds:
With tax managed funds you will have
a similar situation with low turnover. With tax managed
funds stocks are held
long term, and therefore the taxes on the fund will be low.
On mutual fund reports take special note of the term "turnover
rate." If this number is low, typically under 80, the
fund has a low turnover rate and has low taxes. Some media
articles will sometimes list tax-managed funds. So, look
out for the terminology. Taxes can have a significant effect
on your bottom line for certain, (mostly high-income) individuals.
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