Turn Over Ratios for Mutual Funds
Turnover ratios of mutual funds tell you what percentage of the portfolio assets are traded during the previous year. High turnover rates usually mean higher transaction fees for the fund, translating into higher management costs and lower returns. Such portfolio transactions can have tax consequences for non-tax-deferred accounts, even if you hold the investment for the entire year. Mutual fund prospectuses are required to provide the turnover ratio, but you can calculate it yourself with data provided in fund annual reports.
Find the total assets held at the beginning and the end of the most recent year for the fund, found in the prospectus or annual report and labeled "Net assets, end of period." For example, the 2011 report will indicate the value of assets at the end of 2011 assets. For the beginning of 2011, use the end of 2010 net assets.Step 2
Average the figures for the beginning and end of the year to get the average net assets held during the year. Example: Average assets held in 2011 = (End 2011 assets – End of 2010 assets) / 2.Step 3
Find the total purchases or sales during the year. Locate these in the Annual Report for the year in question in a section usually titled "Purchases and Sales of Investments" or "Financial Highlights."Step 4
Divide the larger value of purchases or sales by the average net assets held during the period. The result is the turnover ratio. Multiply by 100 to get a percentage. Example: $12.5 million of sales / $125 million average net assets held during the year = .10 or 10 percent. Some funds have a turnover rate of over 100 percent.
- There is no "average" or desired turnover ratio for mutual funds. The appropriate figure will depend on the fund's strategy, the type of investments it holds and the state of the financial markets during the period. The best way to interpret the number is to check the ratio for several similar funds. Small-cap equity funds are likely to have similar turnover ratios, and a fund that is significantly higher or lower should be researched.
- Turnover ratios can be artificially high or low if there was a large change in the fund's assets during the year from new investment or redemptions. If possible, compare the ratios from year to year and against turnovers from other funds of the same type.
- High turnover ratios can mean higher taxes for you as a shareholder, especially if the fund makes many short-term trades that are taxed at a higher capital gains tax rate. You'll see those capital gains the following year in the Form 1099, which reports your taxable income from the fund, even if you don't sell any shares.
Naomi Smith has been writing full-time since 2009, following a career in finance. Her fiction has been published by Loose Id and Dreamspinner Press, among others. She holds a Master of Science in financial economics from the London School of Economics and a Bachelor of Arts in political economy from the University of California, Berkeley.