Before you purchase your next mutual fund make sure you take a look at the mutual fund turnover ratio. This ratio measures the annual turnover of the stocks inside a particular mutual fund. Recent numbers show the average domestic stock mutual fund turnover ratio sitting somewhere around 80-90%. This means that the average stock is being held less than 15 months by most mutual funds.

High mutual fund turnover ratios are concerning for several reasons. Number one they should concern you because they will make your fees much higher. Let’s be honest, it costs money to make trades and when a manager continues to churn stocks they won’t be the ones paying for it, you will be! Also remember, high mutual fund turnover ratios are going to be a problem come tax time. The inefficiency of churning stocks is seen not only at the individual level, but also at the mutual fund level. Also remember that if a manager is buying and selling a stock once every year or so it has to bring into question whether they really have a solid grip on what is going on. All investors should understand that predicting what will happen over the course of such a short period is very difficult to do, so why would mutual fund managers consistently take a gamble on what will happen over that period? It makes very little sense.

Not all mutual funds have high turnover ratios, and not all of the mutual funds with extremely low turnover ratios are the best funds out there, but you should definitely be wary of a fund with high annual turnover ratios. Avoid high turnover mutual funds since you will end up paying a lot more out of pocket and you likely won’t achieve great investment returns over the long run either.