Holding down trading keeps a lid on costs and can reduce the tax bite, too. By Laura Cohn, Associate Editor May 7, 2010 If you, like many fund investors, are paying closer attention to your costs now than you did before the crushing bear market, there are a couple of numbers to watch out for. One is the annual expense ratio. The figure tells you what you pay to own a fund. Expressed as a percentage of assets, it includes, among other things, management fees and distribution costs.But the expense ratio doesn't account for trading costs, specifically commissions and spreads -- the difference between the price to buy a security and the price to sell it. To get a more complete handle on fees, you need to watch the turnover rate, a gauge of how quickly the holdings in a fund are traded. (You can find the turnover rate in a fund's prospectus and shareholder reports.) "Turnover is one of the most important elements," says Standard & Poor's analyst Todd Rosenbluth. That's because a high turnover rate leads to higher trading costs -- and potential capital-gains distributions, on which you may have to pay income taxes. A 1% ding. How big a bite does turnover take? The typical stock mutual fund has a turnover rate of 100%. This means that, on average, it holds stocks for about a year. Vanguard Group founder John Bogle figures that investors in such funds lose roughly 1% of their assets each year to turnover costs. And that is on top of the 1.4% a year in expenses that investors already pay for the average stock fund. Index funds, which simply track a specific benchmark, are almost always low-turnover by their very nature. Among actively managed stock funds worth considering is Dreyfus Appreciation (symbol DGAGX), which has an uber-low turnover of 7%. That means the fund holds stocks for an average of 14 years. Led by veteran money manager Fayez Sarofim, the fund's team focuses on large multinationals, such as ExxonMobil and Coca-Cola. Over the past ten years, Dreyfus has returned 0.4% annualized, slightly outpacing Standard & Poor's 500-stock index, which was flat. Over the past year, the fund gained 38.3% (all returns are through April 9). Advertisement Another team-managed fund that owns big, well-known companies is Jensen (symbol JENSX). From 2001 through 2008, its annual turnover rate never exceeded 14% (the rate rose to 24% in 2009). The fund gained 41.5% over the past year and returned an annualized 2.9% over the past ten. Jensen's biggest holdings include Microsoft, 3M and Medtronic. If you want low turnover in a small-company fund, take a look at Third Avenue Small Cap Value (symbol TASCX). The fund, run by Curtis Jensen, has a turnover rate of just 15%. During horrible 2008, it sank 35%, just one percentage point more than the drop in the Russell 2000 index of small-company stocks. But over the past ten years, it returned an annualized 7.9%. At last report, Third Avenue had 30% of its assets in foreign stocks. Another smart pick that focuses on small-company stocks is Royce Special Equity (RYSEX). The fund, which has a turnover rate of 10%, lost 20% in 2008, an unusually good showing for that year. Over the past ten years, manager Charles Dreifus has steered the fund to a rousing annualized return of 12.5%. Dreifus recently had 31% of the fund's assets in tiny companies known as micro caps. For a low-turnover fund with a foreign slant, try Tweedy, Browne Global Value (TBGVX). It sports a turnover rate of 16% and holds strong cash generators, such as Swiss food giant Nestle and British spirits maker Diageo. Over the past year, the team-run fund jumped 52.1%, and it gained 6.0% annually over the past decade, topping the MSCI EAFE index of developed-market foreign stocks by an average of 4.1 points per year.