What does it mean when a mutual fund has a 'high turnover rate'?

When a mutual fund has a 'high turnover rate,' it indicates that the fund frequently buys and sells securities within its portfolio. A high turnover rate means that the manager is actively trading assets to capitalize on market opportunities, adjust to changing economic conditions, or respond to specific investment strategies.

This active management can be aimed at achieving better returns; however, it often results in higher transaction costs, which can impact the fund's overall performance. Investors in these funds may see greater short-term capital gains and might also face higher tax liabilities due to increased trading activity.

Understanding turnover is crucial for investors, as it helps them identify the fund's investment strategy and potential cost implications for their investment.