It's that time of the year: Mutual-fund investors are paying taxes on dividends and capital gains, even if they never saw the cash and the payouts went straight toward the purchase of new shares.

What to do? Swear off top-performing stock funds and stick to tax-managed funds?

Not so fast. Taxes obviously lower returns, but making Uncle Sam's cut a top consideration tends to lead to results that are "above average but not necessarily at the very top," says Russel Kinnel, director of fund research at Morningstar Inc.

A fund's tax efficiency doesn't matter if it is in a tax-deferred account such as a 401(k) or an individual retirement account, of course. But an efficient strategy can be a good tie-breaker for deciding among attractive funds for a taxable account.

For best results, Mr. Kinnel suggests looking for good funds with strategies that happen to be tax friendly. For example, Fidelity Leveraged Company Stock Fund averages a 31%-a-year return over the past five years through Feb. 28 before taxes and 30% after taxes. It ranks No. 1 in five-year performance on before- and after-tax performance screens run by Morningstar of top U.S. diversified stock funds.

The fund's manager, Thomas Soviero, keeps annual turnover to a relatively low 23%, meaning stocks tend to stay in the portfolio for about four years. "The taxes aren't what drives decision making, but it's a nice byproduct of being a longer-term investor," he says.

In contrast, Schneider Small Cap Value Fund has one of the largest after-tax drops in Morningstar's screens. Its average annual return falls to 21%, in fifth place on the after-tax list, from 25%, or third place, before taxes.

Schneider looks for small stocks that are severely undervalued and holds them until they return to normal earnings, says Stephen Darby, a managing director and portfolio adviser. The high-turnover strategy isn't tax efficient, he acknowledges, but it isn't meant to be: Schneider's niche is serving tax-exempt investors.

Good indicators of a tax-efficient fund strategy are low annual turnover -- below about 30% -- and a potential capital-gains exposure, or the percent of a fund's assets that represent gains, of less than 25%. Both figures can be found for free at Morningstar.com.

Note that some funds' after-tax returns may be attractive partly because they have used losses harvested during the bear market of 2000-2002. Funds have up to eight years to use past losses to reduce capital gains. Morningstar factors relevant past losses into its calculation of capital-gains exposure.