Mutual funds that trade a lot suffer from lower returns
There seems to be an inverse relationship between trading activity and investment returns: the more you buy and sell, the lower your returns.
Various studies have come to this conclusion. A study of thousands of individual investors using a discount broker found that the most frequent traders had the worst average performance. 
And a well-known study of mutual funds by Mark M. Carhart of Goldman Sachs in 1997 showed that for each 100-point increase in trading by a mutual fund, its returns dropped by almost 1 percentage point.
Four trading costs
A new study published in the Journal of Indexes used updated mutual fund information to test Carhart’s results. It identified four costs borne by a fund that trades actively:
- Despite a move to decimal pricing, stocks continue to have a small bid/ask spread, meaning that the price paid for a stock is a little higher than the price it can be sold for.
- Funds must pay commission costs on trades.
- Investors bear the tax cost of trades, especially those involving securities held for less than one year.
- Funds seeking to buy or sell large blocks of stock will impact its price, often to the detriment of the fund.
More trading
The average turnover in mutual funds has increased over the last 25 years. Turnover is expressed as a percentage of how many times the total value of a fund is bought and sold in one year. A 100 percent ratio means the fund traded all of its value in one year; a 200 percent ratio means it did that twice in one year.
The study used rolling three-year holding periods from 2001 to 2006 and found that large capitalization stock funds lost 0.19 percent of return for each 100 percent of turnover, on average.
Mid-cap funds lost 0.45 percent, while small-cap funds lost 0.80 percent and international stock funds lost 0.98 percent.