Most individual investors who invest in mutual funds are not sensitive to the tax consequence of their investments, especially for holdings not included in before-tax 401(k), IRA, or other before-tax retirement plans. Mutual funds that trade in and out of equities—buying and selling dividend-producing investments—tend to generate more gains that expose an investor to tax consequences that are the investor’s responsibility on his income taxes each year. Morningstar reports the tax ratios of mutual funds in order to see the tax efficiency of a fund, compared with its peers. Ultimately, you can see how a fund’s total return is diminished by taxes that ultimately are paid on gains realized by the fund. Since mutual funds, through their trading activity, are regularly distributing stock dividends, bond dividends, interest payments, and short-/long-term capital gains to investors, taxes must be paid by the investors for each filing year. A fund with a 2% tax-cost ratio means that during a particular year, the investors in the fund lose 2% of their assets to taxes. Tax-cost ratios may range from 0% (very tax efficient) to 5% (very tax inefficient)