Whether you invest in mutual funds, or have a financial advisor manage a portfolio on your behalf, the individual assets in the account(s) are always being bought and sold. The turnover ratio reflects the percentage changes in your assets on an annual basis. If a fund owned 10 stocks and replaced five of the stocks throughout the year it would have a turnover ratio 50%. A high turnover ratio can lead to increased costs (in the form of trading fees) and the potential of tax implications. Turnover typically means you will have short-term capital gains (which will be taxed).
Some funds, based on their investment strategy, will naturally have higher than average turnover. You might see a turnover rate of more than 100% in more aggressive funds. A low turnover ratio, somewhere between 20%-30%, would indicate a buy-and-hold strategy and be considered a more conservative-minded investment.
InvestorKeep will send you an alert if your turnover ratio is significantly out of line with similar funds. This does not necessarily mean that it is a bad investment. The turnover ratio by itself is not the sole reason to invest in any particular fund. If you receive such an alert, it’s worth a conversation with your financial professional to ensure the fund is right for your financial plan.