Tax-Cost Ratio

Apr 8, 2021 2:15:08 PM / by Michael Dailey

Tax Cost Ratio1

 

When you buy a mutual fund, you are in essence investing in a business. When that business makes money (earns a return) and gives it to you (in the form of dividends, there are tax consequences. The tax-cost ratio is a metric that measures how those taxes are impacting your investment returns. The higher the  tax-cost ratio, the more you are paying in taxes on your investment. According to Morningstar (a well known fund rating agency), the average tax-cost ratio is between 1 and 1.2. If you are invested in a fund with a higher tax cost ratio, you may want to own it within a qualified account (an account that grows tax-free) like an IRA or 401(k), protecting you from the higher tax basis. 

 

It is important to view the tax-cost ratio as just one of the factors for reviewing a fund. It would not be prudent to select a fund based only on its tax-cost ratio. It could be a poor performing fund, have questionable management, high-fees, or not fit your investment goals. InvestorKeep will alert you if the tax-cost ratio of any funds you own is higher than average. If you receive one of these alerts, it's a good opportunity to discuss whether said fund fits your investment goals with your financial professional.  

 

 

 

 

Michael Dailey

Written by Michael Dailey

Michael Dailey is the Founder and CEO of InvestorKeep, a company passionate about help you save money and maximize your investments. The average investor loses well over $100K to the implications of investment fit, fees, and quality. InvestorKeep gives you an easy way to monitor investments helping you keep and earn more.