How To Maximize After-tax Returns
In order to keep taxable distributions from mutual fund distributions to a minimum, you must take into consideration tax-efficient funds for your investment portfolio.
In the context of tax-efficient investment, what is more significant than what you earn is what you can keep. The goal is to maximize your after-tax returns. The tax efficient mutual funds make applications to investments outside of IRAs, 401(k)s and other tax-deferred accounts.
T. Rowe Price, a renowned global investment management firm, opines that tax-efficient mutual funds are gaining fast popularity even in the face of deductions in tax rates.
Taxes do not feature among pleasant thoughts. However, investors aiming at reducing taxes and maximizing after-tax returns don’t really have a choice but to think about taxes. It is their job to keep track of their portfolio holdings, distributions and their huge volume of transaction data.
However, tax-efficient investment is not just about avoiding taxes, it is much more than that, as explained by Don Peters, who is in charge of a number of tax-efficient portfolios at the global investment management firm, T. Rowe Price.
He adds that correct tax-efficient investing means the ability to build and manage a portfolio of securities so as to enable you to hold on to it for a long period and ensure that you maximize your after-tax returns.
However, tax-efficient investments are not free from some misconceptions. A very common misconception is that it is not wise to buy stocks of companies that pay dividends, as the latter is believed to be taxable. Don Peters clarifies that the system is far from being so simple.
The second misconception in the context of tax-efficient investing is that investors can end up coughing up a considerable capital gains tax if they sell off their holdings. Peters warns investors against allowing tax phobia to stand in the way of smart and wise investment decisions.
He explains that investors might find it very difficult to arrive at a decision to sell, especially where a considerable unrealized capital gain is involved. Don Peters also mentions that to have a tax-efficient investment strategy to be successful and give good returns, profit should be maintained at a minimum but greater than zero.
