Turnover Ratio

Turnover ratio. A mutual fund's turnover ratio measures the percentage of holdings that the fund sells, or turns over, in a year.

For example, if a stock fund manager has a portfolio of 100 stocks at the beginning of the year, sells 75 of them and buys 75 different stocks, the turnover rate of the fund is 75%.

Some investors look for funds with lower turnover ratios, since limited trading may help to minimize capital gains taxes and trading costs. However, a high turnover ratio can also produce strong returns, which can offset the added costs and produce a net gain.

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Turnover Ratio

What Does Turnover Ratio Mean?

The percentage of a mutual fund or another investment vehicle's holdings that is replaced (“turned over”) by other investments during the course of a specific period. A mutual fund's investment objective, along with the portfolio manager's active management, plays an important role in the amount of turnover that occurs in a portfolio.

Investopedia explains Turnover Ratio

As an example, a stock index fund that is not actively managed has a very low turnover rate, but a nonindex fund or a bond fund typically has more turnover because active trading is an inherent part of active portfolio management, particularly as bonds mature and are replaced with new bonds. An aggressive small-cap growth stock fund generally experiences higher turnover than does a large-cap value stock fund. Investors should avoid mutual funds with high turnover because they incur higher trading costs and can produce additional tax liabilities, which in the end translate into lower returns. Turnover ratios for a mutual fund vary from year to year, but a fair approximation can be ascertained by looking at turnover over a few consecutive years.

Related Terms:
• Expense Ratio
• Index
• Index Fund
• Liquidity Ratios
• Mutual Fund