The Definition of "Portfolio Turnover"
Portfolio turnover is a basic measurement tool of the amount of trading activity in a mutual fund's portfolio. It measures the ratio of stocks purchased to stocks sold and offers a look at how quickly a fund is turning over its holdings.
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Calculation
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The calculation of portfolio turnover is performed by taking the lesser of the number of new securities purchased and new securities sold over a period of time and dividing it by the net asset value in the mutual fund. The rate is stated as a percentage.
High Turnover
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A portfolio with a relatively high turnover rate indicates that the fund buys and sells stocks frequently. This is common for high-growth mutual funds, but a downside for potential investors is that frequent transactions incur transaction fees.
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Low Turnover
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Mutual funds with low turnover make less regular buys and sells of stocks. This is common to income-generating or low-growth funds. Fewer transactions incur less in transaction costs and are indicative of a more conversative trading approach.
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References
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