Not all funds pay the same taxes. Funds that frequently trade their holdings pay more taxes than funds with a long-term outlook. Unless the shareholders are invested in an IRA or other tax-exempt account, they have to pay taxes whenever a fund sells a stock and profits. Hence, the more profitable trades, the more taxes paid. Try to stay away from funds with a high turn-over rate.
Some fund managers count on attractive short-term returns to attract new investors.
Smart investors look for the best total return. Turnover Ratio A concept that is important to mutual fund investing is turnover ratio. This is the percentage of the portfolio that is sold out completely and reinvested in new securities versus what is still held. In a broader context, it signifies what level of trading activity the manager of the fund initiates. Turnover ratio will affect the capital gains and also the actual expenses a mutual fund incurs.