Tags: mutual funds | tax efficient investing | tax planning

The market bottomed three years ago and has jumped 21% on an annualized basis since that time. That means capital gains distributions could be on the horizon, at the same time the long-term capital gains rate is slated to go up to 20% for many investors next year.

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There are several ways fund investors can begin taking taxes into account, says Christine Benz, Morningstar's director of personal finance. Bond-fund investors can shift assets toward tax-free municipal bonds, for example.

“Index funds and exchange-traded funds that track broad market segments also tend to be naturally tax-efficient and are therefore good bets for investors looking to limit capital gains distributions from the holdings in their taxable accounts,” she writes.

Benz also identified some high-performing tax-managed funds, naming Vanguards’ suite of tax-managed funds her favorite.

For investors who are looking for tax-managed funds in the mid-cap category she singled out Buffalo Mid-Cap (BUFMX), and for those seeking a contrarian strategy she recommends Primecap Odyssey Stock (POSKX).