When investing in taxable funds, with an eye to obtaining high returns while keeping taxes low. Taxes reduce the amount of money you can use for your personal and family goals. Generally, watch the historical impact of taxes for the Fund, for it will likely continue. Remember: It is not what you earn, but what you keep after taxes that makes you wealthy.

Look for Tax Efficiency. Your tax-adjusted return is the estimated return after the impact of taxes. There are two different ratios to watch: the tax cost ratio and the potential capital gains exposure (see Table 3)

The Tax Cost Ratio is the percent of nominal Fund return attributable to taxes, assuming the fund is taxed at the highest rate. If a fund had an 8.0% return, and the tax cost ratio was 2.0%, investors in the Fund took home (1 + return) * (1 – tax cost ratio) -1 or (1.08*.98)-1 or 5.84%.

The Potential Cap Gains Exposure is an estimate of the percent of the Funds asset’s that represent gains. If this is high, the probability is high that these may come to the investor as capital gains rather than ordinary income.