How to Annualize the Turnover of a Portfolio
One often overlooked consideration when investing a mutual fund or a stock portfolio is turnover. This is simply the percentage of a fund's holdings that have exchanged within one year. This is important to investors because stocks held for under 12 months are taxed higher than those held over a year. The United States Securities and Exchange Commission requires that each mutual report its annual turnover rate. However, you also can calculate the turnover rate.
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Instructions
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1
Find the fund's total net asset value for the past year.
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2
Find the fund's total amount of new securities purchased in the past 12 months
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3
Find the fund's amount of securities sold in the past 12 months.
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4
Determine which amount is lower: the amount of purchases or the amount of securities sold.
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5
Divide the amount found in Step 4 by the total net asset value to find the annualized portfolio turnover. To convert that number to percentage, multiply by 100.
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Tips & Warnings
All of the figures needed to calculate portfolio turnover can be found in a mutual fund's prospectus.
Mutual funds that focus on long-term growth typically have low turnover rates. Mutual funds that focus on shorter term gains and take more risk typically have higher turnover rates.
Generally speaking, transaction costs and taxes rise with the fund's portfolio turnover rate. In converse, transaction costs and taxes typically decline with a fund's turnover rate. To make up for the difference in costs and taxes, a fund with a higher turnover rate should outperform funds with lower turnover ratios for it to be considered in most mutual fund portfolios.
