Watch "Turnover" to Avoid Paying Extra Taxes

Q: I'm looking to invest in a mutual fund. I've found one with low annual operating expenses that I think meets my investing goals. Anything else I should look out for?

A: Don't forget to consider the fund's turnover rate, particularly if you are holding your investment in a taxable account. A fund's portfolio turnover rate measures how often it buys and sells securities. A fund that frequently buys and sells securities may generate both higher trading costs (which will eat into your returns) and capital gain taxes, potentially leaving you with a higher tax bill.

The difference between a fund's before- and after-tax returns can be quite striking. Don't believe Investor Ed? Take a look at the prospectus of a fund with a high turnover rate.