Preventive Measures: Seeking Shelter In Tax-Efficient Funds.

Mutual funds exhibit a wide range of tax efficiency. Indeed, some stock mutual funds have tax efficiencies of nearly 100% over long time periods. Such funds might, for example, return 15% per year pre-tax and return 14% or more after-tax. Taxable bond funds, on the other hand, are notoriously tax inefficient because, typically, most of their returns come from income that is subject to federal income tax.

For investors whose primary objective is income, municipal bond funds provide income that is generally free from federal income tax and, for state-specific municipal bo