Archive for the ‘Stock Market’ Category

Efficient Mutual Fund Investing by Avoiding Taxes

June 9th, 2011 Vijaianand

Mutual funds have been one of the safest avenues for many American to invest for the future whether its for retirement or kids education. Mutual fund companies have gained their reputation by showing good returns and solid growth. Many mutual fund companies have evolved strongly by good fund analysis with strong results and catering to various needs of the investor gaining investor sentiment from novice to veterans.



Many of us invest in mutual funds because it is bit safe and saves time as the fund managers are paid to do the job of portfolio analysis, effective investment by incorporating diversification and asset allocation strategies according to each fund’s goal. Another main reason, mutual funds are less expensive for amount of diversification and assets involved in the funds. If someone has to do the same kinda of diversification, it would cost more on transaction fees alone not to add other cost. So it is not prudent unless you have big asset to handle.



Above all, we look for good, solid return and performance. On the downside, we really don’t pay attention to the taxes on mutual fund earnings. We all know not all mutual funds are made equal but all them have the tax component associated with it. Taxes can be biggest drag on the funds performance. Every year many investors lose certain percentage points of fund returns because they don’t try to lower their taxes.



It is not a big science or need to learn lot of tax codes to implement it. Just by keeping certain aspects of tax saving concepts in mind and adapting them which will help you portfolio. Here is the list of 3 simple strategies/concepts you can follow while trying to invest in mutual funds.



1. Low Turnover Ratio – Check for a fund’s portfolio turnover ratio which is the percentage of its assets that were sold during the most recent quarter or year. If the fund has high turnover ration mean it is a more aggressive fund. For example, a turnover of 500% means a fund sold the equivalent of its entire portfolio of securities five times during the year. That raises a fund’s expenses, and the likelihood of capital gains taxes. It is a good idea to limit your tax consequences by avoiding funds that trade most of their holdings in a given year. That means being wary of turnover ratios above 50%.



2. After-tax Return – Like you calculate any material cost after taxes, calculate fund tax return after taxes. So look beyond a mutual fund’s pretax return is wise thing to do. After tax returns will give the right picture of profit margin after all the tax deductions. The tax-adjusted return accounts for capital gains, dividends and interest.


3. Capital Gain – If you are worried about big tax bill, it is good idea to analyze a funds possible capital gain exposure before you buy it. Possible exposure tallies capital gains that haven’t been distributed to shareholders and divides that number by total net assets.


If you don’t want to go through the head-ache of analysing every funds, you have option to go with tax-efficient funds or ETF’s.



Tax Efficient funds, also called as Tax Advantage  funds, are structured and operated on reducing the tax liability faced by its shareholders. It uses variety of techniques to keep the taxes low by purchasing tax-free (or low taxed) investments such as municipal bonds, Low turnover ratio, Offsetting gains by selling other stocks at a loss and Investing in lower-dividend-paying stocks to minimize passthrough dividends.



In conclusion, mutual fund investment can really reap better rewards if you give little bit of attention every year and plan accordingly by lowering taxes.



Source and read article at usatoday.com

Posted in Financial Literacy, Investment Planning, Mutual funds, Stock Market, Taxes Tags: , , No Comments »
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Good news for Small Investors from Vanguard

May 16th, 2011 Vijaianand

Vanguard is always considered to be best among the bunch on mutual fund arena. They maintain their high standard in many ways by giving expense ratio less on their fund, high minimim fund required to open an account, knowledgeable managers doing good job analyzing the market well enough to manage the fund and so much more. 

If you are wondering what I mean Target funds? Target funds have been famous for some years now for retirement and education portfolios. The fund is diversified to have different asset classes depending on the target year. It uses sliding asset allocator model. They usually start with aggressive on stocks and become more conservative with bonds over time.

For example, if you are 35 and you selected the target year for retirement to be 2041 and chose 2040 target fund. The asset allocation in the fund will be more aggressive with stocks 90% and bonds 10% as an example. Once the years progress,the asset allocation changes to 50-50% and later to 20%-80% and so forth

Until last week, they had minimum $3000 required to open any funds including Target Retirement fund. Since last week, they relaxed the requirement and made a big move to cut down their minimum open fund needed. Now an young investor who like to take advantage of the vanguard Target Retirement portfolio, they only need $1000. It is a smart move by them to attract young, small time investors.

Check out more details at vanguard.com

Posted in Investing, Investment Planning, Mutual funds, Stock Market Tags: , , No Comments »
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Tax Planning – Stock Investment Strategies – II

April 27th, 2010 Vijaianand

In the last couple of posts, we been looking at how Tax planning can have an effect in your tax preparation. We saw the difference between Tax Planning and Tax preparation. We also started digging in deep on how the cost basis and stock selling strategy can save you some money. In the previous post, I started explaining about different types of determining cost basis and will complete in this post. At the end of this post, you will know which methods helps on different situations. So read on.

Check out the cost basis using FIFO method before moving on to read so you can better understand the difference.

Average cost is another method for determining cost basis and is only used with investment/mutual funds. To determine the average cost, the total cost of all shares purchased including any invested dividends is divided by the total number of shares held.


Once this method is used, it must be used each time the taxpayer sells shares in a mutual funds. This method is most effective if the shares purchased first have the lowest cost basis.


Average cost has 2 different ways of calculating according to the stock purchased periods. The single category method is when the investor takes all of the purchase amounts and divides by total number of shares owned. The double category method sorts the total shares owned into a short-term and a long-term holding period. Then, the average cost for each category is identified.


For example, Jan buys the Vanguard growth fund

  • 200 shares on January 3, 2001 at $20/share

  • 300 shares on September 5, 2002 at $25/share

  • 200 shares on April 20, 2008 at $22/share

On Oct 15, 2009 she sold 500 shares at $20/share. What is her cost basis according to the average cost method?


According to the single category average cost method, she would take an average of the purchase prices and divide by the total number of shares owned:

  • 200 shares at $20 = $4,000

  • 300 shares at $25 = $7,500

  • 200 shares at $22 = $4,400

  • Total cost = $15,900

  • Total shares = 700

  • Average cost per share = $22.71

So the gain/loss for this sale was:

  • 500 shares ($20 – $22.71) = -$1135.50

Therefore, Jan had a net loss of = -$1135.50


The specific share identification method implies that specific shares are used to apply against the shares sold.


Before selling shares, the shareholder must inform the broker or fund company regarding which shares are to be sold. These instructions must be given at the time of sale or transfer, not later. The broker or agent must confirm this request within a reasonable time after the sale.


This method can be used effectively only if the shareholder has kept accurate records and has followed through on the receipt of confirmations from the broker. It allows the shareholder to control the capital gains taxes that he or she has to pay because this can be determined by selecting the shares to sell. You can tell your broker to sell your highest-cost shares when unloading part of your holdings in a stock. Using this “specific ID method” requires you to identify the shares to be sold by specifying their cost and purchase dates. You must also receive a written confirmation of your instructions from the broker or keep a record of your oral instructions. Put this in your tax file for safekeeping.


Which method is suitable and when?

Specific ID method is the best method for tax purposes because the investor has absolute control over how much the gain from a sale would be. Long term or short term gains can also be controlled. This is the preferred tax basis method for investors who actively manage their portfolio for tax efficiency. It is also not the most cost effective because of all of the effort that is required for proper record-keeping.


If you don’t follow th procedure, you must use the first-in, first-out (FIFO) method, meaning the shares you bought first are considered sold first. Those were likely the cheapest — giving you the biggest possible tax hit. The point to remember is that you must take action at the time of sale to use the specific ID method.

Short term Vs Long Term

If you have both unrealized gains and losses in your portfolio, but want to make some sales in a certain way matching them property to get the best effect.  First, the general rule is try to sell long-term holdings (held over 12 months) first to benefit from the 15% maximum long-term capital gains rate. Then, unload your short-term holdings.


Then in order to offer offset those gains, you can sell the loser stocks for loss to balance it out. You will generally get the most tax-saving for the buck by selling short-term holdings for a short- term loss by taking advantage of short-term losses offsetting short-term gains which would otherwise be taxed at the regular income tax rate and any leftovers then offset long-term (15%) gains.

By following the above strategies matching your situation, you can either save some money by not paying to uncle sam way beyond the tax season. That concludes the tax planning – Stock investment strategy by doing cost basis analysis.

Posted in Financial Literacy, Stock Market, stocks, Tax Planning, Taxes Tags: , No Comments »
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