of securities from the portfolio is out of your control, which reduces your ability to engage in tax management. Of course, if the mutual fund is held in a tax-deferred retirement account such as an IRA or 401(k) account, these tax management issues are irrelevant. A fund with a high portfolio turnover rate can be particularly "tax inefficient." Turnover is the ratio of the trading activity of a portfolio to the assets of the portfolio. It measures the fraction of the portfolio that is "replaced" each year. For example, a $100 mil- lion portfolio with $50 million in sales of some securities with purchases of other securi- ties would have a turnover rate of 50%. High turnover means that capital gains or losses are being realized constantly, and therefore that the investor cannot time the realizations to manage his or her overall tax obligation. The nearby box focuses on the importance of turnover rates on tax efficiency. In 2000, the SEC instituted new rules that require funds to disclose the tax impact of portfolio turnover. Funds must include in their prospectus after-tax returns for the past one, five, and 10-year periods. Marketing literature that includes performance data also must in- clude after-tax results. The after-tax returns are computed accounting for the impact of the taxable distributions of income and capital gains passed through to the investor, assuming the investor is in the maximum tax bracket.     2 An interesting problem that an investor needs to be aware of derives from the fact that capital gains and dividends on mutual funds are typically paid out to shareholders once or twice a year. This means that an investor who has just purchased shares in a mutual fund can receive a capital gain distribution (and be taxed on that distribution) on transactions that occurred long before he or she purchased shares in the fund. This is particularly a concern late in the year when such distributions typically are made. I. Introduction 4. Mutual Funds and Other Investment Companies The McGraw−Hill Companies, 2001           LOW "TURNOVERS" MAY TASTE VERY GOOD TO FUND OWNERS       With lower capital-gains tax rates in store, mutual-fund investors are going to be rewarded by portfolio managers who believe in one of the stock markets most effective strategies: buy and hold. This is because, under the new federal tax agreement, investors will face far lower taxes from stock mutual funds that pay out little in the way of dividends and hold onto their gains for as long as they can. So, how can you find such funds? The best way is to track a statistic called "turnover." Turnover rates are dis- closed in a funds annual report, prospectus and, many times, in the semiannual report. Turnover measures how much trading a fund does. A fund with 100% turnover is