Tax Efficiency
How can taxes be efficient?
Tax efficiency is a shorthand term referring to how much and how often your mutual fund manager pays in taxes on appreciated stock. It affects how much you, the investor, get to keep.
When a mutual fund sells appreciated stock, it generates a taxable event for its shareholders (reflected usually in December, when most funds distribute long and short-term capital gains to shareholders).
Funds that take a patient approach to stock investing – buying stocks that represent good value and holding them long term – ordinarily will generate fewer such taxable events than more aggressive funds, where managers might be investing more aggressively and buying and selling frequently.
A general rule to keep in mind is this:
Fewer taxable events = greater tax efficiency.