What Is a Low Turnover Mutual Fund?

Portfolio turnover is a term used to reflect the amount of activity within a mutual fund or stock portfolio. A low-turnover portfolio has very limited activity, whereas a high-turnover portfolio will buy and sell securities more actively.

Calculating Turnover

Turnover is calculated by dividing the dollar value of securities sold by the total value of the portfolio--typically expressed for a defined period, such as one year.

Turnover Examples

A portfolio which sells $5 billion of securities and has a total net asset value (NAV) of $2 billion will have an annual turnover rate of 250 percent. One which sells $1 billion of securities and has a $2 billion portfolio NAV will have a turnover of 50 percent.

Expenses

There are transaction costs associated with buying and selling securities within any portfolio. These costs---paid for with fund assets---impact total operating expenses. This can reduce the net performance of the portfolio.

Tax Implications

Taxable capital gains---as reported on form 1099-B---are paid by the shareholder. This is not a consequence for funds held in a retirement plan. As a result, turnover is not as great a consideration.

Considerations

While decreased transaction costs and potential tax implications are desirable, a higher-turnover fund may have a fund manager who can avoid losses by selling, therefore preserving value that would otherwise be lost to the market decline.

References

• Bankrate.com: Mutual Fund turnover defined
• Morningstar.com: Low-turnover mutual fund 10-year performance
• Morningstar.com: High-turnover mutual fund 10-year performance