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.