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7. Investing in Mutual Funds > Analyze the Hidden Costs of Fund Turnover

Analyze the Hidden Costs of Fund Turnover

When fund managers jump in and out of stock or bonds in search of quick profits, the fund companies pick your pocket for the cost for all those transactions.

Mutual fund managers who enthusiastically swap investments cost you money both in brokerage commissions and taxes on capital gains. John Bogle, the mutual fund investing guru, views such managers as no more than short-term speculators, who raise your fund costs an estimated 2 to 3 percent of your fund assets annually through higher brokerage commissions and market impact costs. A recent Standard & Poor study validated Bogle’s suspicions, proving that low-turnover funds outperform their higher-turnover cousins. If you’re investing in a taxable account, taxes take another bite out of your profits when mutual funds distribute capital gains, interest, and dividends. A look at a fund’s turnover rate can tell you whether a fund manager trades frequently, or buys and....


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