If you’re thinking about investing in mutual funds you may have come across the term “turnover rate.” Turnover rate is simply the percentage of a fund’s holdings that are replaced in a given year and it’s important to take into account when you’re considering an investment.
Why is turnover important? Because it can have a big impact on your taxes. When a fund manager sells a security that generates a capital gain or loss that is passed on to investors. If you hold the fund in a taxable account you may have to pay taxes on those gains even if you don’t sell your shares in the fund.
Turnover can also impact a fund’s performance. A high turnover rate means the manager is buying and selling a lot of securities which can lead to higher trading costs. Those costs can eat into the fund’s returns and in some cases can even outweigh the benefits of the manager’s investment strategy.
So how can you find out a fund’s turnover rate? It’s usually disclosed in the fund’s annual report or prospectus. You can also find it on most fund rating websites.
When you’re considering an investment be sure to take turnover rate into account. It can have a big impact on your taxes and performance.
What is a mutual fund’s turnover rate?
A mutual fund’s turnover rate is the percentage of the fund’s holdings that have been replaced in a year.
Why is turnover rate important?
Turnover rate is important because it affects a fund’s expenses.
Higher turnover means higher expenses which can eat into returns.
Why might a fund have a high turnover rate?
A high turnover rate might be due to the fund’s strategy or the manager’s style.
Why might a fund have a low turnover rate?
A low turnover rate might be due to the fund’s strategy or the manager’s style.
What is an example of a fund with a high turnover rate?
A high-turnover fund might be a growth fund or a fund that employs a aggressive strategy.
What is an example of a fund with a low turnover rate?
A low-turnover fund might be an index fund or a fund that employs a buy-and-hold strategy.
How do turnover rates vary by asset class?
Turnover rates for equity funds tend to be higher than for bond funds.
How do turnover rates vary by fund type?
Turnover rates for actively-managed funds tend to be higher than for passively-managed funds.
What are the tax implications of high turnover?
High turnover can create a higher tax bill for investors as gains may be subject to short-term capital gains rates.
How can investors find a fund’s turnover rate?
An fund’s turnover rate is typically disclosed in the fund’s prospectus.
Is a high turnover rate always bad?
No a high turnover rate is not always bad.
It depends on the circumstances.
Is a low turnover rate always good?
No a low turnover rate is not always good.
It depends on the circumstances.
What are some other things to consider when evaluating a fund’s turnover rate?
In addition to expense ratios investors should also consider a fund’s performance and whether the turnover is due to buying and selling or simply reallocating holdings.
Can turnover rate tell investors everything they need to know about a fund?
No turnover rate is just one piece of information that investors should consider when evaluating a fund.
Where can investors find more information on mutual fund turnover rates?
Morningstar and other financial research firms offer data on mutual fund turnover rates.
