Understanding Portfolio Turnover in Mutual Funds: Impact & Implications

Considering the portfolio turnover of a mutual fund is an important step that you must take before investing. Portfolio turnover and have a large effect on the success of a mutual fund. The amount of turnover in the portfolio refers to how often the securities in the portfolio are bought and sold. A high turnover ratio means that the fund is very active and buys and sells frequently. A low turnover ratio means that the portfolio purchases securities and then holds them for long-term.

Investment Implications

As an investor, this can affect you in a few different ways. The tax implications are something that you want to be aware of. A fund that frequently buys and sells securities will typically not be as tax efficient for you as an investor. This could mean more capital gains taxes that can significantly reduce your earned profits.

In addition to extra taxes, you may also have to pay higher costs for the mutual fund. The expense ratio the mutual fund is the amount of money that you pay for the ongoing operation of the fund. This tends to be higher for actively managed funds as compared to passively managed funds.