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I am looking at investing in a mutual fund and reading over the Fund Summary Prospectus.

There is a paragraph that says

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in more taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense examples, reduce the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 3% of the average value of its portfolio.

The part that bothers me is that it may indicate higher transaction costs and may result in more taxes. How do I know if it WILL have higher fees and what are those fees?

Seems like this is a very nice place to hide whatever fees they want. Above this section in the prospectus, there are details about the Annual Fund Operating Expenses and detailed examples. Then they throw this section in and make it seem like By the way, we might charge you more than the annual fund operating expenses, but we won't tell you how much. Pretty confused by this.

Is there any way to know how much Portfolio Turnover will cost me in addition to the Annual Fund Operating Expenses?

  • Transaction costs are not fees you pay to the fund manager, these are costs you pay to the market for transacting when you trade. If you trade slowly then you can just put your bid into the market and wait for the transaction. If you're fast you need to take best available price. The difference between the two is transaction cost. – SMeznaric Jan 18 '17 at 11:35
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may result in more taxes when Fund shares are held in a taxable account.

When the fund manager decides to sell shares of a stock, and those shares have grown in value, that growth is a capital gain.

If that fund is part of a taxable account then the investors in the fund will have to declare that income/gain on their tax forms. That could require the investors to have to pay taxes on those gains.

Of course if the investors are holding the fund shares in a IRA or 401K then there are no taxes due in the near term.

A higher portfolio turnover rate may indicate higher transaction costs...

...These costs, which are not reflected in annual fund operating expenses or in the previous expense examples, reduce the Fund’s performance.

The annual fund operating expenses are the expenses that they can assume will happen every year. They include salaries, the cost of producing statements, paperwork required by the government, research...

It doesn't include transaction costs. Which they can't estimate what they will be in advance. If the fund invests in a particular segment of the market, and there is a disruption in that segment, they may need to make many new investments. If on the other hand last year they made great choices the turnover may be small this year.

During the most recent fiscal year, the Fund’s portfolio turnover rate was 3% of the average value of its portfolio.

That may be your best indicator.

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As Kurt Vonnegut said, the way to make money is to be there when large amounts of money are changing hands and take a little for yourself; they'll never notice.

That's what transaction costs are: when a fund buys or sells stocks a bit of the money goes to the folks who handle the transaction. When you personally buy or sell stocks a bit of the money goes to the broker in the form of a fee. (and, no, no fee brokers don't work for free; they just hide the fee by not getting you the best possible price).

So frequent transactions (i.e., higher portfolio turnover) mean that those little bits of money are going to the intermediaries more often. That's what "higher transaction costs" refers to -- the costs are higher than in a fund that buys and sells less often. In short, those higher transaction costs are a consequence of higher turnover; nothing nefarious there.

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