Understanding portfolio turnover ratio

Portfolio turnover ratio can help you assess the investment style, efficiency, and expenses of mutual funds.
Portfolio turnover ratio
4 mins
26 March 2024

If you are an investor who wants to invest in mutual funds, you might have come across the term portfolio turnover ratio. But what does it mean and how should it affect your investment decisions? Read on to find out.

What is portfolio turnover ratio?

Portfolio turnover ratio is a measure of how frequently a mutual fund buys and sells its securities in a given period, usually a year. It indicates how actively the fund manager trades the portfolio and how often the fund changes its composition. A higher portfolio turnover ratio means that the fund manager is more aggressive and makes more changes to the portfolio, while a lower portfolio turnover ratio means that the fund manager is more passive and holds the securities for a longer time.

How to calculate portfolio turnover ratio?

Portfolio turnover ratio can be calculated by dividing the total value of securities sold or purchased by the fund, whichever is lower, by the average net assets of the fund in the same period. For example, if a fund has an average net asset value of Rs. 100 crore and it sells securities worth Rs. 40 crore and buys securities worth Rs. 50 crore in a year, then its portfolio turnover ratio is 40% (40/100).

High vs. low portfolio turnover ratio in mutual funds

Depending on the portfolio turnover ratio, mutual funds can be classified into high turnover funds and low turnover funds. Here are some of the characteristics and implications of both types of funds:

  • High turnover funds have a portfolio turnover ratio of more than 100%, which means that they replace their entire portfolio at least once in a year. These funds are usually more aggressive and aim to capture short-term market opportunities. They may generate higher returns in a bullish market, but they also incur higher transaction costs, brokerage fees, which reduce the net returns for the investors. High turnover funds also tend to be more volatile and risky, as they are more exposed to market fluctuations.
  • Low turnover funds means that they retain their portfolio for more than two years on average. These funds are usually more conservative and follow a buy-and-hold strategy. They may generate lower returns in a bullish market, but they also save on transaction costs, brokerage fees, which increase the net returns for the investors. Low turnover funds also tend to be more stable and less risky, as they are less affected by market fluctuations.

How portfolio turnover ratio assists mutual fund assessment

Portfolio turnover ratio is one of the important factors that can help you assess the performance and suitability of mutual funds for your investment goals. Here are some of the ways that portfolio turnover ratio can assist you in mutual fund assessment:

  • Portfolio turnover ratio can help you understand the investment style and strategy of the fund manager. You can compare the portfolio turnover ratio of different funds in the same category and see which one matches your risk appetite and return expectations. For example, if you are looking for a long-term investment with low risk and steady returns, you may prefer a low turnover fund over a high turnover fund.
  • Portfolio turnover ratio can help you evaluate the efficiency and effectiveness of the fund manager. You can compare the portfolio turnover ratio of a fund with its benchmark index and see how well the fund manager is able to beat the market.

Thus, portfolio turnover ratio is a useful metric that can help you understand and compare the performance and suitability of mutual funds for your investment goals. However, it is not the only factor that you should consider while investing in mutual funds. You should also look at other factors such as fund performance, fund objectives, fund size, fund ratings, fund manager’s experience, and fund diversification.

Note: After you have performed the required analysis and identified the funds you want to invest in, you can simply click on the “Explore Funds” button on top of this page and check out 1,000+ schemes available to investors. Investing through the Bajaj Finserv Mutual Funds platform is quite easy and hassle-free, and you can choose to make a lump sum or SIP investment in the funds of your choice.

Frequently asked questions

What is a good portfolio turnover ratio in mutual fund?

A good portfolio turnover ratio in mutual fund depends on the investment objective, strategy, and style of the fund. There is no fixed rule or benchmark for a good ratio.

Should portfolio turnover ratio be high or low?

Portfolio turnover ratio should be high or low depending on the risk appetite, return expectations, investment horizon, and tax implications of the investor. Generally, low turnover ratio is preferred over high turnover ratio, as it implies lower costs and taxes.

Is a high portfolio turnover ratio good?

A high portfolio turnover ratio is good only if it is justified by higher returns (on a risk-adjusted basis) than a similar-style fund with a low turnover ratio. Otherwise, a high turnover ratio indicates unnecessary and unprofitable trades.

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