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High Turnover Ratios Warnings

Turnover ratio can be defined as the percentage of the investment portfolio that is being bought and sold during one year.

Many investors in their attempt to get the highest returns overlook the major goal that they have to have, namely highest profits after taxation. As a result they commit the common mistake of guiding the mutual fund by the growth percentage, instead of turning their attention to the turnover ratio. For instance, you may ignore a fund that enjoys a 15% growth and has no turnover in order to invest in a fund that has sufficiently higher growth, let's say 19% and a 90% turnover. By doing so you will make a big mistake, because you will ignore the high implications that taxes will have on the latter fund.

Turnover ratio should be out of your consideration in case you have put your hard earned money in the tax exempt accounts of IRAs, Roth IRAs, 401k plan or other retirement plans. Additionally, you should not care about the turnover ratio if the investments you manage are for non-profit objectives.

Aside from these types of investments, the rest are highly susceptible to taxes. Therefore, if you have invested your money in one of them you should pay special attention to the turnover ratio. Additionally, if your income falls in the highest bracket, you should be even more cautious. High percentages of turnover, such as 50% or more, signify the habit of renting stocks. However, an exception is made for convertible bonds, which include high turnover ratio as part of the deal. Otherwise, you should view a high turnover rate as a signal to reconsider your investment with the particular mutual fund, since the managers convey insecurity as regards to their investment style.

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