What is a mutual fund's turnover ratio and why does it matter?

• A. Turnover ratio measures how often assets within a fund are bought and sold; high turnover can raise costs and taxes.
• B. Turnover ratio indicates the fund's average maturity.
• C. Turnover ratio reflects the fund's risk level.
• D. Turnover ratio is the manager's compensation relative to fund assets.

Answer: (A)

Turnover ratio shows how actively a mutual fund trades its holdings over the year. It indicates how often assets within the fund are bought and sold. A higher turnover means more trading activity, which can raise transaction costs and trigger capital gains distributions, potentially reducing after-tax returns for investors in taxable accounts. Lower turnover tends to keep costs down and can improve tax efficiency. This metric doesn’t tell you the fund’s risk level, its average maturity, or the manager’s compensation; those are separate considerations.