Business and Personal Finance Dictionary

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• TAX-EFFICIENT FUNDS
  
  When mutual funds distribute their earnings and any short- or long-term capital gains, its shareholders must report those amounts as taxable income (unless they own the fund in a tax-sheltered retirement plan). If the fund can reduce taxable income, it may be described as a tax-efficient fund. However, the goal is to be tax-efficient while still producing a strong positive return. One approach stock fund managers may use to create tax efficiency is to emphasize stocks expected to grow in value over those that produce current income, or yield. Another approach is to reduce turnover, which means buying and holding stocks for long-term gains. In general, the smaller a fund's turnover, or buying and selling, the more tax-efficient it can potentially be. That's one reason that index funds are tax-efficient. Since these funds mirror a particular index, they buy and sell investments only when the composition of the index changes.
  
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