what the turnover ratio can tell you
the turnover ratio varies by the type of mutual fund its investment objective and the portfolio manager s investing style for example a stock market index fund will have a low turnover rate since it duplicates a particular index and replaces holdings only when the index changes an actively traded mutual fund may have a high turnover rate depending on how aggressively its manager buys and sells holdings in search of better returns actively managed mutual funds with a low turnover ratio reflect a buy and hold investment strategy funds with high turnover ratios indicate an attempt to profit by a market timing approach an aggressive small cap growth stock fund will generally experience higher turnover than a large cap value stock fund as a technical indicator the turnover ratio itself has no intrinsic value a high turnover ratio is not necessarily bad nor is a low turnover ratio necessarily good however investors should be aware of the consequences of turnover frequency high turnover often results in increased costs for the fund due to the payment of spreads and commissions when buying and selling stocks these increased costs are passed on to the investors and are reflected in the fund s return overall also the more portfolio turnover in a fund the more likely it is to generate short term capital gains these are profits on assets held for less than one year and are taxable at an investor s ordinary income rate which is often higher than the capital gains rate 12a mutual fund s turnover ratio shouldn t be the sole basis of a decision to invest or divest in it however it can be useful to see how a particular fund s turnover ratio compares with others of the same type of investment approach a low turnover ratio is considered to be between 20 and 30 while a high turnover ratio is considered to be 100 or more so an investor willing to take some risk yet be somewhat conservative might target funds with turnover ratios around 50 3if a fund s turnover ratio is significantly out of line with that of comparable funds it might be something to note say that most funds in a particular sector have turnover ratios around 5 but one fund posts a 25 turnover in one year in this instance the investor might want to know why did a new portfolio manager come in and decide to wipe the slate clean was there a change in the fund s objective or say that most funds in another sector have 75 turnover ratios but there is one with a ratio of 35 is management there asleep at the wheel turnover ratio alone shouldn t be a deciding factor but an abnormally high or low ratio among comparable funds is a reason to look harder at the fund s performance over time to see just how successful its strategy has been examples of how to use the turnover ratiothe bny mellon appreciation fund from fidelity dgagx has a strong buy and hold strategy in mostly blue chip companies with total market capitalizations of over 5 billion at the time of purchase those companies show sustained profitability strong balance sheets global expansion and above average earnings growth in keeping with the fund s objective of capital preservation as of dec 31 2023 the fund s turnover ratio was 3 76 4fidelity s rydex s p small cap 600 pure growth fund rysgx invests in the common stock of companies within the capitalization range of the underlying s p small cap 600 index and derivative instruments at least 80 of the fund s net assets are invested in fast growing companies or firms in up and coming industries and it seeks to match the index s performance on a daily basis at the end of march 31 2023 the rydex fund had an average turnover ratio of 812 5