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Turnover

The term "turnover" refers to a measurement of the degree to which securities are bought and sold within a mutual fund over a given year. Normally turnover rates are expressed as a percentage of the fund's net asset value. This measurement is used to judge the degree to which the mutual fund is actively managed.

Sometimes turnover is calculated by dividing the number of transactions by 2 so that buying one security and selling another is counted as a single transaction thus reducing the appearance of the overall turnover amount. The consequence of a high turnover rate to investors is the realization of capital gains distributed as dividends which are taxable under the U.S. tax code. (See tax code section 1222.)

Most investors in mutual funds look for a balanced degree of fund turnover. An actively managed fund will stay apace of market trends and will seek to predict which stocks are likely to increase in value, but an extremely high turnover rate may point to management indecision and can have high taxation consequences.

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