Definition of Tax-Efficient Fund

Tax efficient fund is a mutual fund in which tax-liability of fund holders is minimized by managing an investment portfolio. In tax-efficient funds, capital gains distributions and dividend payments to shareholders are reduced by reducing portfolio turnover and concentrating on investments in organizations with low dividend pay outs respectively.

Explanation of Tax-Efficient Fund

Tax-efficient funds appeal to the investors who lie in high tax brackets as the potential savings are more in tax-efficient funds.

Example

Suppose Mr. X wants to invest but he also wants to avoid giving huge taxes. So in order to tackle this situation he looks for tax-efficient funds and invest in a mutual fund. The manager of tax-efficient fund (mutual funds) invests Mr. X’s money in such a way that large tax liabilities are not created.