Question

5. How do expenses and turnover impact mutual investment performance?

Answer 1

The turnover percentage is used to determine the extent at which a mutual fund will turn over its stocks and the assets during the year. It represents the percentage of the mutual fund’s holdings which changed over the year. A mutual fund with the high turnover rate will increases its costs to its investors. The cost for the turnover is used from the asset’s funds, as opposed to management fee. Therefore, mutual fund managers will not have much incentive to reduce the unnecessary trading activity.

Higher turnover rates will results in increased fund expenses, which consequently can reduce he fund's overall performance. It can also have the negative tax results.Investors will have to pay the taxes on those capital gains.

Expense ratios are the representative of what percentage of the fund’s assets is being used to cover admin and operating cost. To compute a mutual fund’s expense ratio, you have to divide the total fund costs by the fund assets. The more the fund costs are, the potential for lesser returns for investors.