Understanding Mutual Fund Turnover: Impact on Your Returns & Taxes

The annual turnover of a mutual fund is something that you will need to be aware of. The turnover of a mutual fund can affect you in a number of different ways. Here are a few reasons that you might want to keep an eye on the turnover in your mutual funds.

Tax Efficiency

The first thing that the annual turnover affects is the tax efficiency of the fund. When a fund constantly buys and sells securities, there is a good chance that it will trigger a capital gains tax. When investing in a mutual fund, you do not want to have to pay any more taxes than necessary. Therefore, a fund that has lower turnover, has a better chance to reduce the amount of capital gains tax that you have to pay.

Strategy

As an investor, the amount of turnover that a mutual fund has can also tell you quite a bit about the strategy that they employ. If a fund has a high amount of turnover, then you can feel certain that they are trying to accomplish growth for the investors. By constantly buying and selling stocks, they are trying to find the next big winner for the portfolio.