Mutual Fund Investments

Investing in mutual funds is a smart way to generate more income. However, it’s important to keep in mind that you are required to pay taxes on most mutual fund income. While, sometimes, these taxes aren’t that bad, there are certain cases in which the taxes can outweigh the overall benefit of the investment. To help you determine whether or not an investment is worth it, tax-wise, your best bet is to speak with an investment advisor. However, you can also make use of a few simple tips.  

Tip #1: Reduce Turnover Ratio

A mutual fund will automatically become more tax efficient if its turnover ratio is reduced. What that means, in simple terms, is that when a mutual fund executes a lot of trades, it will have high turnover, thus causing you to have to pay regular, full-price tax rates on the fund’s gains. By buying and selling fewer securities throughout the tax year- you should buy and sell only when it’s absolutely necessary and will ultimately be financially beneficial-you can thus reduce the amount and type of taxes you’ll have to pay.

Tip #2: Don’t Invest in (As Many) Dividend Paying Stocks and Bonds

Dividend-paying stocks and bonds are not always a bad thing. Indeed, they can be quite beneficial since you’ll enjoy regular interest payments. However, you do want to keep in mind that the more of these investments you have and thus the more funds you get from them, the higher your taxes are going to be, and this income is generally taxed at the regular rate.

Your best bet is to steer clear of dividend paying investments or to only choose those that are going to ultimately benefit you more than they’re going to hurt you. Again, an investment advisor can really come in handy for helping you to figure out whether a particular investment of this type is really going to be worth it.

Tip #3: Invest in Tax Free Funds

One final smart thing you can do is to choose to invest in tax free funds, such as government or municipal bonds. These investments will gain interest for you, and the good news is that the interested gained will not be taxed! You can go for a completely tax-free mutual fund or just include tax free funds in your mutual fund; either way, you’ll benefit by getting money you can enjoy without paying taxes.

For more tips and personalized, one-on-one advice, make sure you secure a skilled investment advisor to help you make all the right decisions and to put these tips into practice!