Taxable funds report higher yields than tax-exempt funds. To compare returns, multiply the taxable fund's return by a factor one minus your tax bracket. For instance, a 5.5 percent taxable return in the 28 percent tax bracket is equivalent to a tax-exempt return of 3.96 percent. Look at your taxable-equivalent yield when investing in taxable funds. This gives you a better benchmark of how your investments perform, and allows you to factor in your tax rate when looking at investment performance.
Mutual funds producing high investment returns are an enticement to buy shares.
Timing your share purchases is important. Shortly after you buy shares, for instance, the fund may distribute dividends and capital gains, triggering a tax liability. Even if you've just bought into the fund, you'll be liable for taxes on this income for the distributions made to your shares. To minimize the tax impact, call the mutual fund company and ask it when these distributions are made. You should also consider the benefits of investing in growth funds, which invest in companies that typically pay little or no dividends.