Fidelity tax efficient funds

Tax-Efficient Saver Portfolios for Fidelity Investors

Editor's note: These portfolios were updated on June 10, 2019.

It's not too big of a stretch to suggest that market returns could be constrained over the next decade or even two. Stocks aren't especially cheap in the wake of a decade-long bull run, and current bond yields, which tend to be a good predictor of future returns for bondholders, remain pretty low

A low-return environment puts the onus on investors to do more of the heavy lifting--spending less and saving more--to keep their plans on track. And because investors will need every basis point of return they can earn, they'll also benefit from playing small ball--being parsimonious about investment and tax costs, for example.

Fidelity's lineup is a good fit for investors aiming to build low-cost, tax-efficient portfolios. While not every fund in the firm's stable is inexpensive and/or tax-efficient, Fidelity does field top-flight index and municipal-bond funds. Both sets of products tend to have low costs and keep taxable distributions to a minimum.

Let's take a look at how younger investors--those still working and accumulating assets for retirement--could build low-cost, tax-friendly portfolios using funds from the Boston-based giant. Whereas our Fidelity Saver portfolios are geared toward investors in tax-deferred accounts like 401(k)s and IRAs, these portfolios are appropriate for investors' taxable accounts.

Portfolio Basics
I created three tax-efficient Fidelity Saver portfolios: Aggressive, Moderate, and Conservative. I used Morningstar's Lifetime Allocation Indexes to guide their asset-class exposures. I employed  Morningstar's medalist funds--Fidelity municipal-bond and indexed equity funds--to populate them. I specified the lowest-minimum share class for these portfolios, but investors should, of course, opt for the lowest-expense share class they qualify for.

Investors should also be sure to keep asset-location and time-horizon considerations in mind when deciding what to put into their taxable portfolios. Because equities tend to be more tax-efficient than taxable bonds, conventional wisdom holds that accumulators should maintain an equity-heavy stance in their taxable accounts while holding more bonds in their tax-sheltered accounts. In fact, a 30-something could reasonably hold all of his or her bond funds (presumably a modestly sized stake) in his IRA and 401(k), while holding only stocks inside of the taxable account. But time-horizon considerations might suggest they do just the opposite: If they're saving for shorter-term, nonretirement goals in those accounts, they'd likely want to hold more cash and bonds than are depicted in these portfolios.

Aggressive Tax-Efficient Saver Portfolio
Time Horizon Until Retirement: 40 Years | Risk Tolerance/Capacity: High | Target Stock/Bond Mix: 90/10

10%:  Fidelity Intermediate Municipal Income(FLTMX)
30%: Fidelity Total International Index ((FTIHX))
60%:  Fidelity Total Market Index((FSKAX))

Geared toward a young accumulator, the Aggressive Fidelity Tax-Efficient Saver mutual fund portfolio uses the allocations of Morningstar's Lifetime Allocation 2060 Aggressive Index to guide its weightings. That index devotes more than 90% of its assets to stocks, including a healthy dose of foreign names. Thus, anyone considering such a portfolio should not only have a long time horizon but should also be able to tolerate the volatility that can accompany a very high equity allocation. Although the Lifetime Allocation Indexes call for a dash of commodities and TIPS exposure for inflation protection, neither of those asset classes is tax-efficient, so I didn't include them here. 

I used two broadly diversified equity index funds for the bulk of the portfolio--a larger position in a total U.S. market tracker and a smaller stake in a fund that tracks the MSCI All Country World ex-US Index. Both feature low costs and broad diversification. 

Moderate Tax-Efficient Saver Portfolio
Time Horizon Until Retirement: 20-Plus Years | Risk Tolerance/Capacity: Above Average | Target Stock/Bond Mix: 80/20 

20%: Fidelity Intermediate Municipal Income
25%: Fidelity Total International Index 
55%: Fidelity Total Market Index 

This portfolio is geared toward a slightly older investor, one who intends to retire in 2040. (Assuming a retirement at age 65, our hypothetical individual would be in his or her 40s today.) But the Moderate portfolio, like the Aggressive version, includes a large stock position and a still-sizable allocation to foreign names. 

As with the Aggressive Saver mutual fund portfolio, I've used Morningstar's Lifetime Allocation Indexes to help set the baseline asset allocations. In this case, I used the Moderate version of the 2040 index. 

Conservative Tax-Efficient Saver Portfolio
Time Horizon Until Retirement: 10 Years or Fewer | Risk Tolerance/Capacity: Low | Target Stock/Bond Mix: 65/35 

15%:  Fidelity Limited Term Municipal Income(FSTFX)
20%: Fidelity Intermediate Municipal Income
15%: Fidelity Total International Index 
50%: Fidelity Total Market Index 

Because the bond piece of this portfolio is larger than is the case with the Moderate portfolio, it's also more diversified. While younger accumulators can get away with a single well-diversified bond fund--in this case, Fidelity Intermediate Municipal Income--people closing in on retirement will want to start diversifying their fixed-income exposure. Thus, I added a position in a short-term bond fund. With retirement 10 years into the future, it's too early to start raising cash for in-retirement living expenses; at today's very low yields, the opportunity cost of doing so is simply too great. But pre-retirees might consider steering part of their fixed-income sleeves to a short-term bond fund that could be readily converted into cash. After all, having sufficient short-term assets in the portfolio can help mitigate sequencing risk--the chance that a retiree could encounter a lousy market right out of the box.

Sours: https://www.morningstar.com/articles/714432/tax-efficient-saver-portfolios-for-fidelity-investors

No Tax Bill if You Hold This Fund

Manager Keith Quinton says his fund avoids generating taxable distribution through several common tax-management strategies. For instance, he keeps track of the cost basis of each lot of stock he purchases. He'll sell the highest-cost lot first. That may generate losses he can use to offset realized capital gains. He also strategically uses losses, which can be carried forward for up to seven years. And he'll wait until 12 months have elapsed before selling a winner so that the fund is booking a long-term tax rate (15% federal rate) instead of a short-term capital gain (taxed at up to 35% on federal taxes).

Unlike most tax-managed funds, Fidelity's does not deploy a long-term buy-and-hold investment strategy. "I take a more aggressive shotgun approach," says Quinton. "I harvest losses where investments don't work and use them to shelter gains."

In constructing his portfolio, Quinton says he relies on both quantitative analysis (he's a quant by background) and fundamental company analysis coming his way from Fidelity's army of 100-plus stock analysts. He concentrates his investments in stocks that show well on both screens. Some of his large holdings as of July 31 included IBM (IBM), United States Steel (X), ConocoPhillips (COP) and Abbott Labs (ABT).

If you're investing money from a taxable account in a mutual fund, you may want to pay more attention to the tax efficiency of your fund. You can find historical comparisons of before- and after-tax returns of the fund in its prospectus or on Morningstar.com. And if tax rates rise after this fall's elections, you may want to pay even more attention. "The higher the tax rates, the more benefit there is to tax efficiency," says Quinton.

Fidelity Tax Managed Stock charges annual expenses of 0.82%. It requires a minimum investment of $10,000 and levies a 1% redemption fee on shares held less than two years-a policy designed to discourage trading of the fund's shares, which can reduce its fund's tax efficiency.

Sours: https://www.kiplinger.com/article/investing/t041-c009-s001-no-tax-bill-if-you-hold-this-fund.html
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Key takeaways

  • Taxes shouldn't be the primary driver of your investment strategy—but it makes sense to take advantage of opportunities to manage, defer, and reduce taxes.
  • Manage federal income taxes by considering how capital gains and losses are recognized in your portfolio.
  • Using tax-deferred accounts when appropriate can help keep more of your money invested and working for you—and then you can pay taxes on withdrawals in the future.
  • Reduce taxes by considering strategies such as donating appreciated securities to charity and funding education expenses using a 529 plan.
  • Educate yourself on the tax implications of your employer's stock plans.

Some investors spend untold hours researching stocks, bonds, and mutual funds with good return prospects. They read articles, watch investment shows, and ask friends for help and advice. But many of these investors could be overlooking another way to potentially add to their returns: tax efficiency.

Investing tax-efficiently doesn't have to be complicated, but it does take some planning. While taxes should never be the primary driver of an investment strategy, better tax awareness does have the potential to improve your after-tax returns. There are several different levers to pull to try to manage federal income taxes: selecting investment products, timing of buy and sell decisions, choosing accounts, taking advantage of realized losses, and specific strategies such as charitable giving can all be pulled together into a cohesive approach that can help you manage, defer, and reduce taxes.

Of course, investment decisions should be driven primarily by your goals, financial situation, timeline, and risk tolerance. But as part of that framework, factoring in federal income taxes may help you build wealth faster.

Manage your taxes

The decisions you make about when to buy and sell investments, and about the specific investments you choose, can help to impact your tax burden. While tax considerations shouldn't drive your investment strategy, consider incorporating these concepts into your ongoing portfolio management process.

Tax losses: A loss on the sale of a security can be used to offset any realized investment gains, and then up to $3,000 in taxable income annually. Some tax-loss harvesting strategies try to take advantage of losses for their tax benefits when rebalancing the portfolio, but be sure to comply with Internal Revenue Service (IRS) rules on wash sales and the tax treatment of gains and losses. Harvesting tax losses on shares you have acquired through an employer stock plan can be complicated by window periods and wash sale rules.

Loss carryforwards: In some cases, if your realized losses exceed the limits for deductions in the year they occur, the tax losses can be "carried forward" to offset future realized investment gains. All gains and losses are "on paper" only until you sell the investment.

Capital gains: Securities held for more than 12 months before being sold are taxed as long-term gains or losses with a top federal rate of 23.8%, versus 40.8% for short-term gains (that is, 20% and 37% respectively, plus 3.8% Medicare surtax). Being conscious of holding periods is a simple way to avoid paying higher tax rates. Taxes are, of course, only one consideration. It's important to consider the risk and return expectations for each investment before trading. Note: Special rules may apply to shares acquired through tax qualified equity compensation plans.

Fund distributions: Mutual funds distribute earnings from interest, dividends, and capital gains every year. Shareholders are likely to incur a tax liability if they own the fund on the date of record for the distribution in a taxable account, regardless of how long they have held the fund. Therefore, mutual fund investors considering buying or selling a fund may want to consider the date of the distribution.

Tax-exempt securities: Tax treatment for different types of investments varies. For example, municipal bonds are typically exempt from federal taxes, and in some cases receive preferential state tax treatment. On the other end of the spectrum, real estate investment trusts and bond interest are taxed as ordinary income. Sometimes, municipal bonds can improve after-tax returns relative to traditional bonds. Investors may also want to consider the role of qualified dividends as they weigh their investment options. Qualified dividends are subject to the same tax rates as long-term capital gains, which are lower than rates for ordinary income.

Fund or ETF selection: Mutual funds and exchange-traded funds (ETFs) vary in terms of tax efficiency. In general, passive funds tend to create fewer taxes than active funds. While most mutual funds are actively managed, most ETFs are passive, and index mutual funds are passively managed. What's more, there can be significant variation in terms of tax efficiency within these categories. So, consider the tax profile of a fund before investing.

Employer stock plans: Participation in your employer's stock plan benefit may carry nuanced, and potentially significant considerations both when selling company stock or filing taxes. (See Taxes and tax filing for more information).

Defer taxes

Among the biggest tax benefits available to most investors is the ability to defer taxes offered by retirement savings accounts, such as 401(k)s, 403(b)s, and IRAs. If you are looking for additional tax-deferred savings, you may want to consider health savings accounts or tax-deferred annuities, which have no IRS contribution limits and are not subject to required minimum distributions (RMDs). Deferring taxes may help grow your wealth faster by keeping more of it invested and potentially growing.

You may already be familiar with tax-advantaged retirement saving accounts.

2021 Annual contribution limitsRequired minimum distribution (RMD) rulesContribution treatment
Employer-sponsored plans
[401(k)s, 403(b)s]
  • $19,500 per year per employee
  • If age 50 or above, $26,000 per year
Mandatory withdrawals starting in the year you turn 72*Pretax or after-tax
IRAs
(Traditional1 and Roth2)
  • $6,000 per year
  • If age 50 or above, $7,000 per year
Mandatory withdrawals starting in the year you turn 72* (except for Roth)Pretax or after-tax
Tax-deferred annuities
No contribution limit**Not subject to required minimum distribution rules for nonqualified assetsAfter-tax

Account selection: When you review the tax impact of your investments, consider locating and holding investments that generate certain types of taxable distributions within a tax-advantaged account rather than a taxable account. That approach may help to maximize the tax treatment of these accounts.

Read Viewpoints on Fidelity.com: Why asset location matters

Stock options: If you receive stock options from your employer, you may have the opportunity to manage taxes by planning ahead on your exercise strategy. One risk to timing your stock plan transactions around taxes is building up an excess of one single company. This is called concentrated risk, or too many eggs in one basket, so always consider all aspects of your investment, and not just the tax implications.

Reduce taxes

Charitable giving
The United States tax code provides incentives for charitable gifts—if you itemize taxes, you can deduct the value of your gift from your taxable income (limits apply). These tax-aware strategies can help you maximize giving:

  • Contribute appreciated stock instead of cash: By donating long-term appreciated stocks or mutual funds to a public charity, you are generally entitled to a fair market value (FMV) deduction, and you may even be able to eliminate capital gains taxes. Together, that may enable you to donate up to 23.8% more than if you had to pay capital gains taxes.3
  • Contribute real estate or privately held business interests (e.g., C-corp and S-corp shares; LLC and LP interests): Donating a non-publicly traded asset with unrealized long-term capital gains also gives you the opportunity to take an income-tax charitable deduction and eliminate capital gains taxes. Shares acquired through an employer stock program are generally good candidates for donation if held long-term and can reduce a concentrated position.
  • Accelerate your charitable giving in a high-income year with a donor-advised fund: You can offset the high tax rates of a high-income year by making charitable donations to a donor advised fund. If you plan on giving to charity for years to come, consider contributing multiple years of your charitable contributions in the high-income year. By doing so, you maximize your tax deduction when your income is high, and will then have money set aside to continue supporting charities for future years.

  • Read Viewpoints on Fidelity.com: Strategic giving: Think beyond cash

The chart assumes that the donor is in the 37% federal income bracket. State and local taxes and the federal alternative minimum tax are not taken into account. Please consult your tax advisor regarding your specific legal and tax situation. Information herein is not legal or tax advice. Assumes all realized gains are subject to the maximum federal long-term capital gains tax rate of 20% and the Medicare surtax of 3.8%. Does not take into account state or local taxes, if any.

Roth conversions

Instead of deferring taxes, you may want to accelerate them by using a Roth account, if eligible—either a Roth IRA contribution or a Roth conversion.2 Any evaluation of a potential Roth conversion should include input from a financial professional, along with a tax and/or estate planning attorney. (Read Viewpoints on Fidelity.com: Answers to Roth conversion questions.)

529 savings plans

The cost of education for a child may be one of your biggest single expenses. Like retirement, there are no shortcuts when it comes to saving, but there are some options that can help your money grow tax-efficiently. For instance, 529 accounts will allow you to save after-tax money, but get tax-deferred growth potential and federal income tax-free withdrawals when used for qualified expenses including college and, since 2018, also up to $10,000 per student per year in qualified K–12 tuition costs.

Health savings accounts (HSAs)

Health savings accounts allow you to save for current or future health expenses in retirement. These accounts have the potential for a triple tax benefit: you may be able to deduct current contributions from your taxable income, your savings can grow tax-deferred, and you may be able to withdraw your savings tax-free, if you use the money for qualified medical expenses.

Read Viewpoints on Fidelity.com: 5 ways HSAs can fortify your retirement

The bottom line

Your financial strategy involves a lot more than just taxes, but by being strategic about the potential opportunities to manage, defer, and reduce taxes, you could potentially improve your bottom line.

Sours: https://www.fidelity.com/viewpoints/investing-ideas/tax-strategy

15 Best Fidelity Funds to Buy Now

Fidelity is one of the most iconic names on Wall Street, and Fidelity funds are among the most respected investment vehicles on the planet. 

The asset manager was established just after World War II and was one of the early leaders in the employer-led retirement plan space after the 401(k) made its debut roughly 40 years ago. Chances are you've owned a Fidelity product in some account or another across your investing life.

But with more than 300 mutual fund options on top of dozens of exchange-traded products, where do you start if you're looking for the top Fidelity funds for your own personal goals?

Here are 15 of the best Fidelity funds that cover a wide variety of investing approaches. Whether you're interested in growth stocks or income from bonds, you're likely to find something that fits with your portfolio here – sometimes, in the same single fund!

Just keep in mind that all investing decisions are personal, and what works for one investor might not fit in perfectly with another. So always do your own research and act with your own unique goals and risk tolerance in mind.

Data is as of Aug. 24. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds. There is no minimum to invest in any of the funds listed here.

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Fidelity 500 Index Fund

concept art
  • Assets under management: $353.3 billion
  • Dividend yield: 1.3%
  • Expenses: 0.015%, or $1.50 annually on every $10,000 invested

The U.S. stock market index of choice for the majority of investors is the Fidelity 500 Index Fund (FXAIX, $155.97). When it comes to Fidelity funds, FXAIX is one of the simplest ways to get broad exposure to the domestic equities market. 

As the name implies, it is benchmarked to the S&P 500 Index, which is the top 500 publicly traded corporations listed on U.S. stock exchanges. And its make up gives investors access to all the big names, including Microsoft (MSFT) and Apple (AAPL).

The major drawback, if there is one, is that the S&P 500 is weighted by market capitalization. So trillion-dollar tech stocks like MSFT and AAPL represent more than 10% of the entire portfolio combined. And when you add up the top 10 positions, you get 27% or so of the fund's total assets. In this respect, the idea of the S&P being built by 500 total companies doesn't tell the whole story; a small list of heavy hitters can move this index more than other stocks.

Still, many of these companies are big for a reason and investors might not be turned off by the weightings. Furthermore, while the makeup isn't terribly creative, the fees are incredibly cheap at just a few dollars a year for most investors.

Learn more about FXAIX at the Fidelity provider site.

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Fidelity Nasdaq Composite Index Fund

Nasdaq superimposed over stacks of quarters and skyscrapers
  • Assets under management: $13.1 billion
  • Dividend yield: 0.6%
  • Expenses: 0.29%

If you're looking for an alternative index fund to the S&P 500, consider the Fidelity Nasdaq Composite Index Fund (FNCMX, $189.26). FNCMX comprises roughly 3,100 stocks listed on the Nasdaq Composite exchange. 

As most investors probably know, the Nasdaq tends to be populated by more tech-oriented companies than the roughly 230-year old New York Stock Exchange (NYSE). In fact, some of the biggest stocks on Wall Street, including Microsoft, Apple and Amazon.com (AMZN) are all Nasdaq-listed names.

Of course, this tech focus brings with it some challenges. Consider that the top 10 positions in this fund tally 44% of the entire portfolio to make it even more top-heavy than the FXAIX. Also, the tech sector and closely related telecom sector are the top two areas of focus, respectively, accounting for more than 57% of the fund's total assets.

This is not necessarily a bad thing for investors who really like the growth potential of high-tech stocks or the stability of mega-cap Silicon Valley icons. If that's your investing style, this is one of the best Fidelity funds for you. 

Learn more about FNCMX at the Fidelity provider site.

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Fidelity Small Cap Index Fund

tiny piggy banks marching together
  • Assets under management: $21.4 billion
  • Dividend yield: 0.9%
  • Expenses: 0.025%

If you'd rather look past the typical mega-cap stocks that dominate the most prominent index funds, then consider the Fidelity Small Cap Index Fund (FSSNX, $28.31). It is made up of roughly 2,000 stocks, with more than 87% having market values of roughly $2 billion or less.

Consider current holdings like hydrogen fuel cell company Plug Power (PLUG) or development-stage biopharmaceutical company Novavax (NVAX) as representative examples. Both companies are currently unprofitable as they invest heavily in future growth – but in the last 24 months, PLUG stock is up 1,150% or so while NVAX is up 3,600%!

Not every small-cap stock is destined for those kinds of gains, of course. These companies have higher risk profiles that also could result in larger potential losses than the more stable blue chips on Wall Street. But you also can score bigger rewards in the long run if the cards fall right.

Learn more about FSSNX at the Fidelity provider site.

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Fidelity Mid Cap Index Fund

arrows hitting bullseye
  • Assets under management: $23.2 billion
  • Dividend yield: 1.0%
  • Expenses: 0.025%

What if rather than go big with Fidelity funds focused on the S&P 500 or Nasdaq, you're looking for those "goldilocks" companies that are neither big nor too small? That's what the Fidelity Mid Cap Index Fund (FSMDX, $32.00) provides, with an aim to invest in mid-cap stocks with market capitalizations that fall between about the $2 billion and $10 billion.

Some stocks get smaller than the low end of that range after declines and some get larger than the high end when they go on a short-term run. However, if those valuations change for a long enough period of time, then the stock will either graduate into a large-cap fund or be demoted to a small-cap fund to keep the strategy in line.

The resulting makeup of this 800-stock fund is quite interesting, and truly diversified thanks to this narrow band of investments in the equity market. Specifically, no sector is worth more than about 20% of the total assets, with technology (19.6%) at the top. Plus, every position is weighted at less than 0.5% of the portfolio at present. The top stocks currently are social media firm Twitter (TWTR) and animal healthcare company IDEXX Laboratories (IDXX) at 0.48% apiece.

Learn more about FSMDX at the Fidelity provider site.

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Fidelity Select Technology Portfolio

technology concept
  • Assets under management: $12.5 billion
  • Dividend yield: 0.00%
  • Expenses: 0.69%

Speaking of narrow bands of the stock market, some investors might be less interested in sorting stocks by size and instead are interested in specific sectors.

While there is no shortage of tactical ETFs out there, the Fidelity Select Technology Portfolio (FSPTX, $29.37) allows investors a mutual fund to play this high-growth sector – and one that does so in an active way instead of traditional index funds.

Right now, FSPTX owns just 113 stocks. You'll find heavy weightings in fan favorites like Microsoft, but you'll also find $9-billion solar technology firm Sunrun (RUN) among its top 10 positions right now. That's not the typical makeup you'll find in a passive tech ETF.

Of course, fees are a bit steeper than a simple index fund that buys all the Silicon Valley giants. However, Fidelity funds have historically empowered active managers – so if you're concerned about some kind of shakeup in the market, the hands-on approach of FSPTX might provide some peace of mind.

Learn more about FSPTX at the Fidelity provider site.

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Fidelity Select Health Care Portfolio

stethoscope on one-hundred dollar bills
  • Assets under management: $10.9 billion
  • Dividend yield: 0.45%
  • Expenses: 0.69%

Another sector-oriented fund that could be worth a look is the Fidelity Select Health Care Portfolio (FSPHX, $34.19). As many investors know, healthcare is one of the more reliable sectors on Wall Street thanks to a constant flow of "customers" as people age and experience medical issues regardless of the macroeconomic outlook.

And without moralizing about the state of American healthcare, it's important to also acknowledge that inflation in U.S. healthcare costs is equally reliable. Consider that the typical American spends 740% more on insurance than they did roughly two decades ago, according to data company Clever.

If you want to follow that constant increase in spending, then why not focus on this sector? FSPHX provides a simple and diversified way to do so. The fund owns about 120 total stocks, with top holdings right now including insurance giant UnitedHealthGroup (UNH), as well as mid-sized vascular device company Penumbra (PEN).

Admittedly, this is one of the Fidelity funds featured here that has lagged the broader market over the last year or so as the initial surge in healthcare stocks prompted by the pandemic has abated more recently. However, the fund's manager has been at the helm since 2008 and has a lot of experience riding the ups and downs of the sector with an eye on the long term.

Learn more about FSPHX at the Fidelity provider site.

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Fidelity Blue Chip Growth Fund

stack of blue poker chips
  • Assets under management: $56.9 billion
  • Dividend yield: 0.00%
  • Expenses: 0.79%

If you like the notion of active management but want to look beyond sector funds, the Fidelity Blue Chip Growth Fund (FBGRX, $193.26) might be right for you. FBGRX offers a way to get more strategic about your exposure to large U.S. stocks without limiting your approach to just one sector.

This Fidelity fund owns about 450 or so blue-chip stocks. But lest you think this is just a mirror image of the FXAIX, it's important to point out the weightings and makeup are very different, even if many of the same names are on the list. 

Case in point: $16-billion ride sharing company Lyft (LYFT) cracks FBGRX's top 10 components, whereas, in a typical fund weighted by market capitalization, it would be dwarfed by trillion-dollar Silicon Valley stocks like Apple. Those top 10 components also represent a heck of a lot more of the portfolio in this top-heavy fund, currently at 45% of total assets.

This bias toward a short list of favorites is also evident in the sector breakdown of FBGRX. Of the 11 standard S&P 500 sectors, six of them rate at roughly 2.5% weightings or less – with almost 82% of stocks spread across three sectors (technology at 37.2%, consumer discretionary at 27.1% and communication services at 17.5%).

There's obviously more risk when you go all-in on a short list of stocks or sectors. However, based on the fact this fund is up about 175% in the last five years versus roughly 106% for the S&P 500 Index, clearly this approach can work when the environment is right.

Learn more about FBGRX at the Fidelity provider site.

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Fidelity Contrafund

big yellow arrow pointing away from smaller white arrows
  • Assets under management: $144.6 billion
  • Dividend yield: 0.00%
  • Expenses: 0.86%

Fidelity Contrafund (FCNTX, $19.74) is one of the big-name funds that has made this asset manager as dominant as it is. Over the last 20 years, Contrafund has regularly outperformed both the Dow Jones Industrial Average and the S&P 500 Index to tack on a 350% return in that period.

A core holding for almost every long-term, growth-oriented portfolio, the fund holds a focused list of about 300 or so top stocks. And more importantly, it isn't afraid to go with big weightings towards names it believes in.

Specifically, right now social media giant Facebook (FB) and e-commerce king Amazon.com collectively represent almost 19% of the entire portfolio between them. This shows both the blessing and the curse of this approach: while Facebook has put in a solid outperformance against the S&P 500 so far in 2021, AMZN has lagged.

When things go well based on the "secret sauce" that Contrafund deploys via its active-management style, FCNTX can handily exceed the standard passive funds out there. But keep in mind, this is one of the pricier Fidelity funds on this list, with the expenses here at 25 to 30 times the cheapest S&P index funds. Translation: FCNTX's outperformance needs to be consistent for this fund to be worth your while.

Learn more about FCNTX at the Fidelity provider site.

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Fidelity Magellan Fund

person drawing on stock chart board with green arrow pointing up
  • Assets under management: $29.9 billion
  • Dividend yield: 0.0%
  • Expenses: 0.79%

Fidelity Magellan Fund (FMAGX, $14.82) is more focused than the Contrafund, with less than 70 total positions. The approach is very much centered on domestic large-cap stocks. However, there is a smidge of international investments that are included in FMAGX, based on what the managers are interested in right now.

Those managers set the tone for the fund in a big way, as you can imagine. In fact, Magellan had one of the most enviable track records on Wall Street, as it experienced massive growth under the management of the iconic Peter Lynch from 1977 to 1990.

Unfortunately, Magellan has been out of step with the market lately as it has "only" tacked on about 21% in the last 12 months, compared with more than 30% for the major U.S. stock market indexes. And with an expense ratio that's pretty high, that underperformance is amplified when you layer on fees.

However, its fund manager insists this lagging short-term performance amid the coronavirus recovery trend should not dissuade investors from "longer-term trends in demographics and productivity" that continue to drive his core investing decisions. If you believe that and share this long-term view, then FMAGX might be one of the best Fidelity funds for you.

Learn more about FMAGX at the Fidelity provider site.

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Fidelity International Discovery Fund

global financial markets concept
  • Assets under management: $11.1 billion
  • Dividend yield: 0.4%
  • Expenses: 1.0%

Looking overseas, Fidelity International Discovery Fund (FIGRX, $59.52) is a core international holding for investors wanting growth, but also diversification beyond U.S. markets. Less than 3% of the fund's roughly 175-stock portfolio is made up of domestic companies, with developed markets including Japan (15%) and the U.K. (13%) as the most influential regions.

That means a smattering of foreign but familiar names, including Switzerland-based drugmaker Roche Holding (RHHBY) and German industrial giant Siemens (SIEGY) near the top of the list of holdings. Emerging markets are also represented, accounting for about 12.6% of FIGRX's total asset allocation.

It's worth noting that over the last few years, U.S. stocks have handily outperformed the rest of the world. Specifically, Fidelity International Discovery is up just 50% or so since mid-2016, while the S&P 500 has roughly doubled in the same five-year period. 

However, if you don't expect this underperformance to continue or if you simply want to hedge your bets with diversification overseas, this actively managed global fund helps take the guesswork out of looking for international stocks.

Learn more about FIGRX at the Fidelity provider site.

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Fidelity Dividend Growth Fund

stacks of quarters with a plant growing out of them
  • Assets under management: $6.9 billion
  • Dividend yield: 1.6%
  • Expenses: 0.49%

Another different "flavor" of stock investing is to look for companies that offer income via dividends, instead of just the potential for capital appreciation. Fidelity Dividend Growth Fund (FDGFX, $37.16) offers this approach, with a narrow list of about 150 large-cap dividend payers that the fund's managers think are the best-equipped to deliver long-term income, as well as reliable share price performance.

Right now, top holdings include growth-oriented digital payments giant Visa (V), as well as embattled industrial giant General Electric (GE). Long-term dividend investors might find this second stock less than appealing, given GE's history of dividend cuts since the financial crisis. However, this is a great example of how FDGFX tries to thread the needle between reliable plays like Visa, but also stocks like GE that managers expect to see significant dividend growth in the years ahead based on their projections of the business. And honestly, with GE only paying a penny per share in dividends, it's not like the distributions could get any smaller unless they are killed altogether.

The yield for FDGFX is slightly better than the typical S&P 500 stock, currently sitting at about 1.6%. But as the name implies, this Fidelity fund is all about the potential for future dividend growth – so if the strategy pays off, your actual yield will grow over time if things go as planned.

Learn more about FDGFX at the Fidelity provider site.

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Fidelity Investment Grade Bond Fund

income building concept
  • Assets under management: $6.9 billion
  • SEC yield: 1.2%*
  • Expenses: 0.45%

Another way to generate a steady stream of income from your investment portfolio is to look beyond stocks to bonds. This asset class is much more stable than stocks, meaning investors don't shoulder as much risk of losing principal value. And this stability can come with reliable yields. The trade off, though, is that bond funds don't experience the same potential for growth as equity ones do. 

The Fidelity Investment Grade Bond Fund (FBNDX, $8.48) focuses only on "investment grade" bond issues – that is, loans taken out by the most credit-worthy entities. Top issuers at present include the U.S. Treasury and government-backed mortgage entities like Fannie Mae, along with top-rated corporations like Goldman Sachs (GS). 

Seeing as the chances of Uncle Sam or big megabanks defaulting on their bond debt are incredibly slim, this is one of the Fidelity funds featured here that you can hang on with confidence for the very long term.

There are about 1,400 different bonds that make up the current portfolio, adding up to a yield of about 1.2%. That's not terribly large and only slightly bigger than the S&P 500 at present, but keep in mind that capital preservation is as much the name of the game as income is – and FBNDX has a portfolio that's built to last.

*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.

Learn more about FBNDX at the Fidelity provider site.

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Fidelity Strategic Income Fund

building blocks with arrows pointing up
  • Assets under management: $16.6 billion
  • SEC yield: 2.0%
  • Expenses: 0.67%

Of course, not all investors are willing to trade bigger income potential simply for the greater reliability that investment-grade bonds offer. That's where Fidelity Strategic Income Fund (FADMX, $12.99) comes in, as it is a multisector bond fund that not only looks at the most reliable bonds, but also the next tier down of debt offerings – colloquially referred to as "junk bonds."

As with consumer finance, less credit-worthy borrowers have to pay a higher premium to the lenders in order to offset the risk of them not making their planned payments on time. In the bond market, the investors are the lenders – and the higher-risk borrowers are battered corporations that have seen better days, but still need ready capital to operate.

So, thanks to an eclectic mix of bulletproof bonds from the U.S. Treasury that yield less than 2% and those of small fry consumer finance firm Ally Financial (ALLY) that yield 8%, FADMX more than doubles the potential payday of the prior investment-grade bond fund with its current yield of 2%.

There is greater risk here, of course, but with an experienced team managing this fund, it could be a great fit for those looking at generating a bit more yield than the typical bond fund.

Learn more about FADMX at the Fidelity provider site.

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Fidelity Balanced Fund

stacks of quarters balancing on top of a jenga game
  • Assets under management: $47.1 billion
  • SEC yield: 0.7%
  • Expenses: 0.52%

If all these Fidelity funds sound interesting in some way but you're having trouble deciding, then why not just go with a one-stop offering via the Fidelity Balanced Fund (FBALX, $32.04)? 

This "asset allocation" fund is not limited to just stocks or bonds, but instead targets a roughly 60% allocation in stocks and a 40% allocation in bonds during a typical market – and builds a holistic portfolio for you. Those stocks are not restricted by hard limits on geography or size, either.

As a great illustration of this, the FBALX portfolio currently holds long-term U.S. Treasury bonds in its top holdings alongside mega-cap insurer UnitedHealthGroup and mid-cap electronic component company Jabil (JBL). That's quite a wide swath of the market to cover!

Interestingly enough, FBALX is one of the more affordable active funds in Fidelity's repertoire – meaning you can get the expertise you're looking for and a hands-on approach to asset allocation without paying out the nose on fees.

Learn more about FBALX at the Fidelity provider site.

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Fidelity Multi-Asset Income Fund

highway sign pointing to stocks and bonds
  • Assets under management: $1.3 billion
  • SEC yield: 6.2%
  • Expenses: 0.85%

A slightly different approach to an asset allocation portfolio is the Fidelity Multi-Asset Income Fund (FMSDX, $14.64) that prioritizes income potential over the long term. So while the prior Fidelity Balanced Fund yields less than 1% a year thanks to its focus on equities that don't pay dividends, FMSDX generates a whopping 6% yield thanks to a target of 40% to 70% of the portfolio in bonds.

Currently, FMSDX is at the lower end of that range as it is loaded up on equities in response to a rising interest rate environment. But even so, it's throwing off a yield that is about four times the S&P 500.

Be warned, however, that this yield is generated from junk bonds – specifically, 24% of the FMSDX portfolio at present is in "non-investment grade" bonds. As discussed previously, this comes with risk, as distressed companies might pay more in interest, but also carry a higher chance of default. 

Still, if you are willing to take on exposure to less flashy companies like this in exchange for big income, this Fidelity fund could be worth a look.

Learn more about FMSDX at the Fidelity provider site.

Sours: https://www.kiplinger.com/investing/mutual-funds/603357/15-best-fidelity-funds-to-buy-now

Tax funds fidelity efficient

Best Fidelity Funds to Keep Taxes Low

One mistake newer investors make with mutual funds is that they forget to manage and reduce the costs of their funds. This can even happen for those with more experience. Minimizing expenses with mutual funds is no different than minimizing expenses when managing your finances. This is also known as managing your cash flow.

Reducing your expenses (cash outflow) is just as beneficial as increasing your revenue (cash inflow). And minimizing taxes in a taxable account has the effect of keeping your expenses low. This increases your net returns.

You can think of this in another way: If you're paying more than necessary in taxes, you take home less money. This means you've reduced the return on your investment. Learn how mutual funds are taxed and become familiar with some actions you can take to lower taxes; this is important if you have investments. Minimizing your taxes will help you get the most from your investments.

Key Takeaways

  • You'll pay taxes on capital gains, dividends, and bond funds; each is taxed in different ways.
  • Fidelity is one of the larger investment management companies. It has mutual funds that can keep taxes low in your taxable brokerage account.
  • You can look at certain key statistics, such as the tax-cost ratio, to predict the tax efficiency of a given fund.
  • Building a portfolio suited for your needs should be your first priority. Then you should look at making it as tax efficient as you can.

How Are Your Mutual Funds Taxed?

Each time you earn money for something you haven't paid taxes on before, the government is going to want its share. One method of taking taxes from investors receiving distributions: the capital gains distributions tax.

Stock mutual funds may invest in hundreds of stocks. During any given tax year, the manager(s) of the fund will buy and sell several of the stock holdings in the portfolio.

Capital Gains Taxes

When the manager sells stocks that have gained in value since the time they bought those stocks, the trades generate capital gains (money earned). These are then passed along to the investor in the form of capital gains distributions.

Capital gains are taxed differently than dividends. Capital gains are taxed as normal income; dividends are taxed at a higher rate. For this reason, distribution funds with low turnovers, such as index funds, can be more tax-efficient than actively managed funds.

Note

Mutual fund turnover occurs when managers sell shares in the fund and replace them with other shares.

Dividend Taxes

Another common form of taxation coming from mutual funds is generated by dividends. Dividends are taxed as normal income; this is true unless it meets qualified requirements. These are dividends from domestic corporations and qualified foreign corporations.

If you want to reduce taxes, you'll want to avoid high-yielding mutual funds. These could include large-capacity (large-cap, or companies with large market capitalization) value stock funds. Fund types that pay little to no dividends include small-cap stock funds and growth stock funds.

Bond Fund Taxes

Bond mutual funds are the type that you'll need to look into the most when it comes to lowering taxes. To keep taxes to a minimum with bond funds, the best type to buy are municipal bond funds.

Note

Municipal bonds are issued by state and local governments and other municipalities.

This type of mutual fund buys municipal bonds. To incentivize government investment, these bonds are free of federal income tax. If you live within the state or municipality that issues the bond, income may also be tax-free on that level.

What Are the Best Fidelity Funds to Reduce Taxes?

Fidelity is one of the larger investment management companies. It has a number of mutual funds that can keep taxes low in your taxable brokerage account.

Note

Lower fees and less turnover are other methods you can use to reduce taxes.

Fidelity Small Cap Enhanced Index (FCPEX)

This index fund focuses on small-cap stocks. In most cases, these pay fewer dividends when compared to large-cap stocks. For instance, the average large-cap stock fund could have a yield of at least 2% or more; FCPEX will often average less than half that.

Low yields will help keep income taxes low. FCEPX has historically beaten more than 90% of other small-cap funds for tax-adjusted returns. The expense ratio is low for a small-cap fund at 0.64%. There is no minimum initial investment.

Fidelity International Discovery Fund (FIGRX)

This is a foreign stock fund that primarily invests in stocks of non-U.S. companies. Foreign stock funds are not commonly tax-efficient. But FIGRX has a track record of better than average tax efficiency and above-average returns as well. These combine to make FIGRX a smart choice for those who need a foreign stock fund in a taxable account.

The expense ratio for FIGRX is below average at .78%. There is no minimum initial investment.

Fidelity Tax-Free Bond (FTABX)

FTABX holds municipal bonds that are exempt from federal income tax. Most of the holdings are bonds issued by state and city governments in the U.S. Municipal bonds often offer lower yields than other bonds. The tax-free status can produce a tax-effective yield that can beat other bonds.

Note

Often, those who are in higher tax brackets benefit the most from holding municipal bond funds like these.

The expense ratio is 0.25%; the minimum initial investment is $25,000. Fidelity also offers tax-free municipal bond funds that focus on states, such as California, New York, and Massachusetts. Those living within these states may choose to use these funds to take advantage of state tax benefits.

Fidelity Tax-Exempt Money Market (FMOXX)

A money market fund can be a smart choice for those wanting liquid fundholding for short-term cash. Similar to the tax-free bond funds, FMOXX will be best for people in higher tax brackets.

FMOXX has an expense ratio of .45%. There is no minimum initial investment.

How Can You Find Your Own Tax-Efficient Funds?

If there are other fund types you need for your taxable account, you can look at certain key statistics to predict the tax efficiency of the fund. One is the tax-cost ratio. This is a measure of how much investors lost due to taxes. For instance, let's say a mutual fund had a 5-year annualized return of 10% and the tax-cost ratio was 1%. The after-tax return would have been 9%.

Some online market and investing websites, such as Morningstar, Inc., offer information on tax-cost ratios and other key indicators such as tax-adjusted returns. For instance, at Morningstar.com, you can search for a mutual fund's ticker symbol. Then, you can learn about the fund you are researching.

Note

Another way to lower expenses: buy funds with no load (or no upfront costs) with low expense ratios.

Once you find the fund's listing on the site, look for the tab that says "Tax" and click on it. That page will display key tax data points; this could include tax-cost ratio and tax-adjusted returns. You can compare these with other funds. Then, choose the one that is best for you and your needs.

Above all, remember to prioritize smart investing practices, such as diversification, risk tolerance, and fund selection based upon your objectives. Don't just look at tax efficiency alone. Building a portfolio suited for your needs should be your first priority. Then you should look at making it as tax efficient as you can.

Sours: https://www.thebalance.com/best-low-tax-fidelity-funds-4124394

Tax-Efficient Investing: A Beginner's Guide

Every investment has costs. Of all the expenses, however, taxes can sting the most and take the biggest bite out of your returns. The good news is that tax-efficient investing can minimize your tax burden and maximize your bottom line—whether you want to save for retirement or generate cash.

Key Takeaways

  • The higher your tax bracket, the more important tax-efficient investing becomes.
  • In general, tax-efficient investments should be made in taxable accounts.
  • Investments that aren't tax-efficient are better off in tax-deferred or tax-exempt accounts.

Why Is Tax-Efficient Investing Important?

The Schwab Center for Financial Research evaluated the long-term impact of taxes and other expenses on investment returns, and while investment selection and asset allocation are the most important factors that affect returns, the study found that minimizing taxes also has a significant effect.

There are two reasons for this. One is that you lose the money you pay in taxes. The other is that you lose the growth that money could have generated if it were still invested. Your after-tax returns matter more than your pre-tax returns. It's those after-tax dollars, after all, that you'll be spending—now and in retirement. If you want to maximize your returns and keep more of your money, tax-efficient investing is a must.

Investment Accounts

Tax-efficient investing involves choosing the right investments and the right accounts to hold those investments. There are two main types of investment accounts:

  1. Taxable accounts
  2. Tax-advantaged accounts

Taxable Accounts

A brokerage account is an example of a taxable account. These accounts don’t have any tax benefits but they offer fewer restrictions and more flexibility than tax-advantaged accounts such as IRAs and 401(k)s. Unlike an IRA or a 401(k), with a brokerage account, you can withdraw your money at any time, for any reason, with no tax or penalty.

If you hold investments in the account for at least a year, you'll pay the more favorable long-term capital gains rate: 0%, 15%, or 20%, depending on your tax bracket. If you hold an investment for less than a year, it will be subject to short-term capital gains, which equates to your ordinary income tax bracket.

Tax-Advantaged Accounts

Tax-advantaged accounts are generally either tax-deferred or tax-exempt. Tax-deferred accounts, such as traditional IRAs and 401(k) plans, provide an upfront tax break. You may be able to deduct your contributions to these plans, which provides an immediate tax benefit. You pay taxes when you withdraw your money in retirement—so the tax is "deferred." 

Tax-exempt accounts, including Roth IRAs and Roth 401(k)s, work differently. Contributions to these plans are made with after-tax dollars, so you don't receive the same upfront tax break that you do with traditional IRAs and 401(k)s. However, your investments grow tax-free and qualified withdrawals in retirement are tax-free as well. That's why these accounts are considered "tax-exempt." 

Tax-Efficient Investing Strategies

Tax-advantaged accounts like IRAs and 401(k)s have annual contribution limits. For 2020 and 2021, you can contribute a total of $6,000 to your IRAs, or $7,000 if you're age 50 or older (because of a $1,000 "catch-up" contribution).

With 401(k)s, you can contribute up to $19,500, or $26,000 if you're age 50 or older in both 2020 and 2021. The combined employee/employer contribution can't exceed $57,000 ($63,500 with the catch-up contribution) for 2020, and $58,000 ($64,500 with the catch-up contribution) for 2021.

Because of the tax benefits, it would be ideal if you could hold all your investments in tax-advantaged accounts like IRAs and 401(k)s. But due to the annual contribution limits—and the lack of flexibility (non-qualified withdrawals trigger taxes and penalties)—that's not practical for every investor.

A good way to maximize tax efficiency is to put your investments in the "right" account. In general, investments that lose less of their returns to taxes are better suited for taxable accounts. Conversely, investments that tend to lose more of their returns to taxes are good candidates for tax-advantaged accounts.

Tax-Efficient Investments

Most investors know that if you sell an investment, you might owe taxes on any gains. But you could also be on the hook if your investment distributes its earnings as capital gains or dividends; whether you sell the investment or not.

By nature, some investments are more tax-efficient than others. Among stock funds, for example, tax-managed funds and exchange-traded funds (ETFs) tend to be more tax-efficient because they trigger fewer capital gains. Actively managed funds, on the other hand, tend to buy and sell securities more often, so they have the potential to generate more capital gains distributions (and more taxes for you).

Bonds are another example. Municipal bonds are very tax-efficient because the interest income isn't taxable at the federal level—and it's often tax-exempt at the state and local level, too (munis are sometimes called "triple free" because of this). These bonds are good candidates for taxable accounts because they're already tax efficient.

Treasury bonds and Series I bonds (savings bonds) are also tax-efficient because they're exempt from state and local income taxes. But corporate bonds don't have any tax-free provisions, and, as such, are better off in tax-advantaged accounts.

Investments that distribute high levels of short-term capital gains are better off in a tax-advantaged account.

Here's a rundown of where tax-conscious investors might put their money:

Taxable Accounts (e.g., brokerage accounts)Tax-Advantaged Accounts (e.g., IRAs and 401(k)s)
Individual stocks you plan to hold for at least a yearIndividual stocks you plan to hold for less than a year
Tax-managed stock funds, index funds, exchange traded funds (ETFs), low-turnover stock fundsActively managed stock funds that generate substantial short-term capital gains
Qualified dividend-paying stocks and mutual funds Taxable bond funds, inflation protected bonds, zero-coupon bonds, and high-yield bond funds
Series I bonds, municipal bond fundsReal estate investment trusts (REITs)

Many investors have both taxable and tax-advantaged accounts so they can enjoy the benefits each account type offers. Of course, if all your investment money is in just one type of account, be sure to focus on investment selection and asset allocation.

The Bottom Line

One of the core principles of investing—whether it's to save for retirement or to generate cash—is to minimize taxes. A good strategy to minimize taxes is to hold tax-efficient investments in taxable accounts and less tax-efficient investments in tax-advantaged accounts. That should give your accounts the best opportunity to grow over time.

Of course, even if it's better to keep an investment in a tax-advantaged account, there may be instances when you need to prioritize some other factor over taxes. A corporate bond, for example, may be better suited for your IRA, but you may decide to hold it in your brokerage account to maintain liquidity. Moreover, since tax-advantaged accounts have strict contribution limits, you may have to hold certain investments in taxable accounts, even if they'd be better off in your IRA or 401(k).

Always consult with a qualified investment planner, financial advisor, or tax specialist who can help you choose the best tax strategy for your situation and goals.

Sours: https://www.investopedia.com/articles/stocks/11/intro-tax-efficient-investing.asp

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Disclaimer: This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Our statements and opinions are subject to change at any time, without notice and should be considered only as part of a diversified portfolio. Mutual funds and exchange-traded funds mentioned herein are not necessarily held in client portfolios. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

You may request a free copy of the firm’s Form ADV Part 2A, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

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Sours: https://www.adviserinvestments.com/adviser-fund-update/tax-efficient-investing-2/


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