Which Turnover Rate Suggests a More Tax Efficient Funds?

C

The turnover rate of a mutual fund is a measure of how frequently the fund's holdings are bought and sold within a given period, usually a year. Higher turnover rates mean more frequent buying and selling of the securities held by the fund. This turnover can lead to increased capital gains, which can be subject to taxes.

Therefore, a lower turnover rate is generally more tax-efficient than a higher turnover rate because it reduces the likelihood of incurring capital gains taxes.

Of the options provided, the answer that suggests a more tax-efficient fund is option C, 5%. A turnover rate of 5% means that the fund buys and sells securities representing 5% of its total assets over the course of a year. This lower turnover rate implies that the fund is holding onto securities for a longer period, which means there is less buying and selling activity and fewer capital gains.

In contrast, options B and D suggest very high turnover rates of 100% and 200%, respectively, which means that the funds are buying and selling securities representing 100% and 200% of their assets each year. These high turnover rates indicate that the funds are actively trading and are more likely to incur capital gains taxes.

Option A, a turnover rate of 10%, is somewhat in the middle of the range provided. While it is lower than options B and D, it is still higher than option C and may not be as tax-efficient.

Therefore, option C, with a turnover rate of 5%, suggests a more tax-efficient fund compared to the other options.