What Is Turnover Rate?
What Is Turnover Rate In Investing?
Not to be confused with baked goods, a turnover rate in investing is the percentage of a mutual fund or other portfolio holding that has been replaced in the course of a year.
Funds that hold their equity positions for less than 12 months have turnover ratios that exceed 100%. Funds that hold their equity positions for more than 12 months have turnover ratios less than 100%.
Understanding A Funds Turnover Rate
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.
Example of Mutual Funds Turnover Rate
The Capital Appreciation Fund from T Rowe Price (PRWCX) has a strong buy-and-hold strategy in mostly blue-chip companies. Those companies show sustained profitability, strong balance sheets, and above-average earnings growth, in keeping with the fund's conservative objective. As of year-end 2022, the fund's turnover rate was 84%.
Conclusions On Turnover Rate
Turnover rate alone won't help you determine whether a mutual fund is the right choice for you. It simply tells you what percentage of stocks and other assets in the fund have been replaced in the course of the year.
It could be relevant to your research into mutual funds, however. If comparable mutual funds have higher or lower turnover rates than the fund you're looking at, it's a signal to look further into the fund's performance. You may find that it's achieving better returns over time due to all of that activity, or lack of activity.
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