Vanguard has introduced the Tax-Managed Small-Cap Fund, a no-load fund aimed at reducing taxes by investing in a diversified portfolio of low-cost, small-capitalization stocks that promise long-term capital growth and nominal current income.

"In general, small-cap stock funds are among the least tax-efficient category of funds due to higher levels of trading activity," said George Sauter, managing director of Vanguard's Core Management Group. "Over the past three years, taxes have confiscated up to 20 percent of the return of the average, small-cap fund." However, by carefully researching stocks for signs of long-term growth, Vanguard expects the fund to substantially decrease the impact of taxes, said Sauter.

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