What is the Portfolio Turnover? And what is it for?
Portfolio turnover is one of those major keys people look at when investing in a mutual fund. It gives them an idea of how expensive a fund can be to hold.
It tells you how often a fund buys or sells a given security over a period of time, usually a year. This is done by figuring out how many positions where opened or closed and comparing it to how many positions the fund holds.
So if a fund holds 40 positions and sells 30 of them the fund has a turnover of 75%, which is a little high.
The reason it is important to look at a funds turnover is
because of cost. If a fund has a high turnover it is going to cost more in two ways. It cost money to enter and exit trades, so if a fund is constantly entering and exiting trades you will get charged for that.
It could also affect your account during tax season. If you own the fund in a taxable account you will have to pay taxes on any profits you take.
In general a fund with a turnover of over 50% is said to be high and one under 50% is said to be low.
But it is also important to remember that this is not a standalone way of finding a good mutual fund to invest in. In most cases it is more important to find a consistent performer then to find one with low cost.
A fund has a high turnover rate but has been making an average of 25% a year is better than a fund with a low turnover rate and has been making a return of 8% a year.
