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Mutual funds solve many headaches for individual investors … if only they weren’t such a burden come tax time.
These investment funds allow you to own portfolios of hundreds or even thousands of stocks for a fraction of what it would cost to buy all of those securities individually.
They take research time off your hands, as well as the time it would take to manage those portfolios. You can buy them with a click of a mouse. And as long as you’re being mindful of fees, they may charge very little for their trouble.
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But mutual funds can be a pain from a tax standpoint — indeed, it’s among the varied reasons why investors prefer the exchange-traded fund (ETF) “wrapper.” Mutual funds, after all, are a pooled portfolio that buys and sells securities. That buying and selling can generate capital gains, and by law, those gains must be passed on to shareholders (usually once a year) as taxable capital-gains distributions.
In other words: You could suffer investing tax consequences even if you didn’t sell any shares yourself, and even if the mutual fund’s overall value declined during the year.
That’s rarely the case with ETFs, which function similarly to mutual funds but have much different “plumbing”; their creation/redemption mechanism allows ETFs to avoid triggering taxable events.
But if you’re averse to paying the tax man, mutual funds aren’t a wholly lost cause.
Read on as we explore some tax-efficient mutual funds. These specific tickers represent a trio of broader mutual fund types that generally deliver lower capital-gains and/or taxable income distributions than most others.
Data is as of February 13, 2026. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds. SEC yields reflect the interest earned after deducting fund expenses for the most recent 30-day period and are a standard measure for bond and preferred-stock funds.
Fidelity 500 Index Fund
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- Fund category: Large blend
- Assets under management: $740.0 billion
- Yield: 1.1%
- Expense ratio: 0.015%, or $1.50 annually for every $10,000 invested
Index funds tend to trade far less than actively managed funds. That’s because they track rules-based indexes that usually only rebalance and reconstitute a few times a year. Actively managed funds, meanwhile, can (and typically do) trade whenever they feel like they can get an edge by doing so. That dearth of trading activity translates into much lower (if not nonexistent) capital-gains distributions.
But all indexes are not created identically — some trade more than others, meaning some are less tax-efficient than others. That’s not the only IRS consideration, either. Index funds that generate a lot of dividend income (stocks) or interest income (bonds) make higher income distributions to their shareholders, and those get levied too.
The S&P 500, then, is ideal on both fronts. It’s practically glacial compared to most indexes — over the past 10 years, for example, the S&P 500 has averaged 21 new components per year, which sounds like a lot but is really only just more than 4% of the portfolio each year. It also yields a little more than 1% right now, which doesn’t make for much of a tax bite, either.
You can own the S&P 500 through a number of funds, but it’s difficult to think of one better than the Fidelity 500 Index Fund (FXAIX), which ranks among the best mutual funds for 2026.
Its 0.015% in annual expenses is as low as you’ll find, not just among mutual funds but ETFs too. And it, like many other funds from Fidelity, has no minimum initial investment, so you can get started for as little as your brokerage or IRA will allow (usually just $1).
And as for taxes? In addition to the small dividend distributions, FXAIX hasn’t paid a capital gains distribution since 2019.
Learn more about FXAIX at the Fidelity provider site.
Fidelity Small Cap Index Fund
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- Fund category: Small blend
- Assets under management: $28.6 billion
- Yield: 1.0%
- Expense ratio: 0.025%
But the Fidelity Small Cap Index Fund (FSSNX) is as tame as you could hope for.
FSSNX is a small-cap “blend” fund (read: both growth and value) that holds nearly 2,000 stocks as I write this. The Fidelity mutual fund churns a few hundred components every year, but again, that comes out to a relatively placid 14%.
Fidelity Small Cap Index hasn’t paid a capital-gains distribution since 2021, and many of its past distributions were mild, at around 2% to 3%.
Learn more about FSSNX at the Fidelity provider site.
Vanguard Tax-Managed Capital Appreciation Fund Admiral Shares
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- Fund category: Large blend
- Assets under management: $27.2 billion
- Yield: 0.9%
- Expense ratio: 0.05%
While index funds by their very nature are tax-efficient, that’s not to say they can’t benefit from a little optimization.
Consider tax-managed funds, which will track an index but also incorporate other strategies, such as holding fewer dividend payers and even utilizing tax-loss harvesting, to minimize your tax obligations.
The Vanguard Tax-Managed Capital Appreciation Fund Admiral Shares (VTCLX), for instance, “attempts to track the benchmark, while minimizing taxable gains and dividend income by purchasing index securities that pay lower dividends.”
VTCLX, which owns more than 840 stocks, is categorized as a large-cap fund, but your actual exposure is more diversified than that — it has a 20% allocation to mid-cap stocks right now, and another 5% to small companies.
And it delivers precious little in the way of taxable distributions. It yields less than 1%, and it hasn’t made a capital-gains distribution since at least 2016 (Vanguard’s data goes back 10 years).
Vanguard actually warns that “tax-managed funds are usually more expensive than comparable funds that don’t have that additional layer of tax management. So they’ll probably make sense for you only if you’re in a higher tax bracket.”
In VTCLX’s case, that’s half-true. Vanguard Tax-Managed Capital Appreciation’s fees are downright economical, with the fund charging a recently reduced 0.05% vs an average 0.68% among comparable funds.
But the minimum initial investment of $10,000 is several times higher than the already lofty $3,000 minimum it charges on retail-facing funds. From that perspective, yes, you’ll probably want to be in a higher tax bracket — because that means you might earn enough to afford splashing 10 G’s on your initial purchase.
Learn more about VTCLX at the Vanguard provider site.
Vanguard Tax-Managed Balanced Fund Admiral Shares
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- Fund category: Moderately conservative allocation
- Assets under management: $11.5 billion
- SEC yield: 2.0%*
- Expense ratio: 0.05%
You can get similar tax-minded treatment with an even more diversified portfolio with the Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX).
This is a “moderately conservative allocation” fund that targets a 50/50 blend of stocks and bonds (though it’s currently closer to 45% stocks and 55% bonds).
The stock sleeve’s 750 components are predominantly mid- and large-cap stocks with an eye on minimizing dividend income. The bond sleeve is a wide 3,750 issues and almost entirely made up of municipal debt, which is exempt from federal taxation (and depending on where the shareholder lives, state and even local taxation).
So while the yield is higher than any of the funds covered so far, the tax impacts remain minimal. And VTMFX hasn’t paid a capital-gains distribution in at least 10 years.
But like with VTCLX, you’ll need to ante up $10,000 to get started.
* We’re using the SEC yield here because a majority of VTMFX’s assets are invested in bonds.
Learn more about VTMFX at the Vanguard provider site.
Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares
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- Fund category: Municipal national intermediate
- Assets under management: $84.6 billion
- SEC yield: 3.1%
- Expense ratio: 0.17%
Speaking of which, municipal bonds are another way to get more tax efficiency from a mutual fund.
Muni bonds, as I just mentioned, aren’t taxable at the federal level. And if you live in the locality and/or state of issuance, those taxes are exempted, too. Because a diversified muni-bond fund will own debt from across the country, the tax break will be largely federal in nature, while state and local will likely only apply to a small portion of your distributions — still, the benefits can be significant.
Consider the Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX), in which portfolio managers James D’Arcy and Mathew Kiselak have built a massive portfolio of more than 15,000 municipal bonds.
They’re tasked with owning munis largely within the three highest categories of credit ratings, though VWITX can own up to 20% in “medium-grade” bonds and 5% in “securities with lower credit ratings.”
This actively managed Vanguard fund currently invests 85% of assets in muni bonds rated A or better; another 6% are BBB, 1% is considered “junk,” and the remainder is in unrated bonds. (Unrated bonds aren’t necessarily of lower quality.) The portfolio is made up of local obligations, special tax debt, higher education levies, utility munis and more.
The tax impact of holding munis is best described by explaining “tax-equivalent yield,” which is the yield a comparable bond fund would have to provide to deliver the same amount of income once taxes were taken out. Let’s say you were in the top (37%) federal tax bracket and also paid the 3.8% net investment income tax (NIIT). A taxable bond fund would have to yield a whopping 5.2% to offer the same amount of post-tax income!
And unlike the tax-managed funds above, this is a retail-facing fund with a more reasonable minimum initial investment of just $3,000.
Learn more about VWITX at the Vanguard provider site.
