Investment turnover is a measure of a fund or account's trading activity and refers to the amount of assets that are disposed of during a given time frame. High investment turnover can result in a high short-term capital gains tax for the investor, and can also indicate that a financial adviser is trading excessively to generate high commissions. Depending on the fund or account objective, some investment turnover is to be expected, even if only for portfolio rebalancing.
Calculating Investment Turnover
Calculate the investment turnover ratio for each asset class on its own, if the account holds additional types of securities in addition to common stocks. For example, if a fund holds all common stock, calculate inventory turnover by dividing proceeds from the sale of common stock by the market value of the beginning balance of common stock investments held by the fund. If a fund sold $5 million worth of common stock and held $10 million worth of common stock at the period's beginning, its turnover ratio equals $5 million divided by $10 million, or 50 percent. This implies that during the stated time period, the fund traded half of its stock investments. If you are managing your own account, you have to meet your objectives, but it generally is a good idea to minimize turnover. This minimizes short-term capital gains tax, which are higher than long-term capital gains taxes, and also minimizes transaction costs.
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