What Is a Good Turnover Ratio?

The definition of what constitutes a good turnover ratio—or turnover rate—for a mutual fund depends entireꦚly on the type of fund you are considering and your goals for the investment. For passive mutual fund in🧸vestments, a turnover ratio near zero is appropriate. If you are investing in a more actively managed fund with the stated goal of generating an aggressive rate of return, the fund could have a higher turnover ratio.

Understanding Turnover Ratios

A turnover ratio is a simple number used to reflect the amount of a 澳洲幸运5官方开奖结果体彩网:mutual fund's portfolio that has chan💃ged within a given year. This figure is typically between 0% and 100%, but can be even higher for actively managed ♈funds. A turnover rate of 0% indicates the fund's holdings have not changed at all in the previous year.

A🔥 rate of 100% means the fund has a completely new portfolio than it did 12 months ago. Everything it owned before has been sold, though not necessarily at the same time, and new investments have been made to replace those assets. A fund with a rate of 100% has an average holding period of less than a year. Some very aggressive funds have turnover rates much higher than 100%.

Indexed Funds

If you are investing in an 澳洲幸运5官方开奖结果体彩网:indexed mutual fund, the passive nature of the security naturally means its turnover ratio should be very low. Indexed funds, as the name implies, are built to track given indexes and require almost no hands-on management. St𝓀ocks are only added or removed from the fund when the underlying index posts a change. An indexed fund with a high turnover rate is not being properly managed. Anythiꦇng over 20% to 30% should be viewed with skepticism.

Active Funds

If you are investing in a mutual fund with the goal of generating rapid returns, you are looking at a higher turnover rate. The 澳洲幸运5官方开奖结果体彩网:type of management strategy these funds employ is based on finding undervalued stocks, selling high and making the most of opportunities, which means there can bꦜe a lot of buying and selling during any given year. Though active funds may not always have very high turnover rates, an active fund that boasts high returns with low turnover is rare.

Some portfolio managers and asset managers find exceptionally high turnover to usually be indicative of a process called "churning," where a manager shuffles around a client's portfolio often in order to drum up trading commissions. Although this may be obvious when an investment professional reviews a trader's or manager's portfolio it can be less obvious to someone without as much formal financial education. For this reason, make sure to compare turnover ratios and commissions paid to a certain fund against those of their competitors.

The Bottom Line

The turnover ratio tells you what percentage of stocks and other assets in the mutual fund have been replaced in the course of one year. It is a useful metric for evaluating mutual funds and deciding which ones can be a good addition to your portfolio. If comparable mutual funds to the one you're looking at have higher or lower turnover ratios, you may want to look further into the fund's performance to find out what causes the high activity or the lack of it, or even find a better choice in different funds.