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Don't try to Pick Stocks - Some of us when we have extra money think that we can invest it in the stock market and earn some returns on...

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Portfolio Turnover

I received an e-mail the other day from a 14-year-old young investor who was looking at mutual fund information and came across a section labeled "Turnover Rate" and he was unsure what it meant.

Every mutual fund has a portfolio turnover rate. The turnover rate is basically the percentage of the portfolio that is bought and sold to exchange for other stocks. For example, if there are 20 stocks in the mutual fund and 5 of those stocks are sold one year so that the mutual fund will be able to buy 5 more stocks, then the turnover rate would be 25% (5 / 20 = .25).

The turnover rate may seem like just another number for you to look at and confuse you but it does have major significance. As a young investor, you may not be too concerned about taxes but your parents might be. This number helps you determine how much you will have to pay in taxes for that mutual fund. For example, if the mutual fund has a low turnover rate, you will probably pay less in taxes. If it has a high turnover rate, you will probably pay more in taxes. For your comparison, the average turnover rate is about 50%.

Some types of mutual funds just naturally have low turnover rates. These include retirement funds, growth and income funds, and equity income funds. Likewise, some mutual funds have high turnover rates. These are usually mutual funds that are riskier and require more concentration such as technology funds.

We hope this has cleared up a couple questions. We apologize if we lost you anywhere in there but if we didn't, you might be able to put this knowledge to use sometime, because the turnover rate is a very important number to consider.


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