Portfolio turnover is the rate at which a mutual fund manager buys or sells securities in a fund, or an individual investor buys and sells securities in a brokerage account.
A rapid turnover rate, which frequently signals a strategy of capitalizing on opportunities to sell at a profit, has the potential downside of generating short-term capital gains.
That means the gains are usually taxable as ordinary income rather than at the lower long-term capital gains rate. Rapid turnover may also generate higher trading costs, which can reduce the total return on a fund or brokerage account.
As a result, you may want to weigh the potential gains of rapid turnover against the costs, both in your own buy and sell decisions and in your selection of mutual funds.
You can find information on a fund's turnover rate in the fund's prospectus.
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