Do you know your portfolio’s turnover rate?
When you use the term “portfolio turnover rate,” you’re usually referring to the trading activity that occurs in a mutual fund over the course of a year. A fund with a high turnover rate likely trades more frequently than one with a lower turnover rate. The Securities and Exchange Commission requires mutual funds to publish their portfolio turnover rate.
A lower turnover rate is a good indicator of a fund’s tax efficiency: When securities in a fund’s portfolio are frequently bought and sold by portfolio managers, the fund’s shareholders have to pay more taxes. Even if you do not sell or exchange your fund shares, you must pay taxes on distributions paid to shareholders by the fund itself.
You can expect to see some deviation in turnover according to the type of fund you’ve invested in.
For example, value-style equity funds – which often invest in out-of-favor stocks that are expected to come back into favor – usually have relatively low portfolio turnover rates; the strategy involves holding on to a stock until the market recognizes its value, which could be a long time.
Index funds – which track a particular index such as the S&P 500 – tend to have limited portfolio turnover because the stocks that make up their indices change infrequently.
Check out your portfolio’s turnover rate. You may be surprised what it reveals.
The legal and tax information contained in this article is merely a summary of our understanding and interpretation of some current provisions of tax law and is not exhaustive. Consult your legal or tax advisor for advice and information concerning your particular circumstances.