If you time your purchase of a fund poorly, you may be on the hook for capital gains and dividend distributions, which are both taxable. Avoid being tempted solely by good historical performance of a fund. It's important to know if a fund is tax-efficient . A tax-efficient fund trades less frequently, racking up lower tax bills as a result. Taxable and tax-exempt money market funds.
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.