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What is Portfolio Turnover Ratio in Mutual Fund?​

The Portfolio Turnover Ratio reflects the percentage of portfolio holdings that were changed/bought/sold/turned over in​ a year. If a fund has a portfolio turnover ratio of 25%, that would mean that 25% of its securities were sold/bought in the previous year. Thus, a higher portfolio turnover ratio implies that the fund manager is changing the holdings at a higher rate and vice versa.

For example, if your mutual fund scheme buys securities worth Rs 1000 Cr, and sells securities worth Rs 800 Cr in a year; then, provided that its average AUM was Rs 1200 Cr,

Portfolio Turnover Ratio= 800 Cr/1200 Cr %= 66.667%

The above example is for illustration purposes only.

Know more about the portfolio turnover ratio-

  1. An actively/aggressively managed mutual fund scheme, in all likelihood, will have a higher portfolio turnover ratio than a passively managed fund.
  2. A portfolio turnover ratio of 100% does not necessarily mean that all the securities in the fund have been bought/sold; rather, it only represents the % of holdings that have changed in any given year.
  3. A higher portfolio turnover ratio will imply more trading costs borne by the fund, thereby increasing the expense ratio and affecting the returns.
  4. The portfolio turnover ratio, ideally, should be used to compare any two funds in the same peer category and along with the other mutual fund analytics tools.
  5. A lower portfolio turnover ratio often is akin to the buy and hold strategy.

High Vs Low

How does the portfolio turnover ratio affect your investment decision?

It must not be assumed that a scheme with a higher portfolio turnover ratio is to be always avoided. Firstly, you may want to look at the risk-return reward as a result of the high portfolio turnover ratio. If it results in a relatively higher risk-adjusted return, then you may want to invest in that scheme. Secondly, the portfolio turnover ratio needs to be seen and compared in tandem with other tools used to measure a mutual fund scheme performance, which is the measure of the return-producing ability of a fund per unit of the risk taken.

Consider an example-

Hypothetically, consider that fund A has a portfolio turnover ratio of 120% and a Sharpe ratio of 0.65 when the category Sharpe ratio average stands at 0.78.

A higher portfolio turnover ratio means that the securities are being turned over often, but the return generated per unit of risk by the fund is still lower than the category average. Thus, even after paying a high expense ratio for this scheme, it may not be tapping into the full return potential of the category. Hence, it may be advisable to reconsider your decision of investing in this fund. Having said that, if the scheme’s Sharpe ratio had been 1.05, that would imply that the return produced per unit of risk taken is relatively much higher and thus the higher expense ratio that you are paying may just be worth it.

In conclusion, there can be many factors like macroeconomic conditions, Government regulations, volatility in the market etc. that may result in a fund manager’s decision of higher turning of securities. Therefore, it may not be ideal to be judging a fund on the basis of its portfolio turnover ratio alone; rather, it can be used as one of the tools to shortlist the mutual fund schemes you wish to invest in.


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Disclaimer:
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing This is an investor education and awareness initiative by Nippon India Mutual Fund.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document. Language Disclaimer:
While utmost care has been taken in translating the article into respective regional language(s), in case of any confusion or difference of opinion, article available in English language should be deemed as final. The article provided herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional advice for the readers. The document has been prepared on the basis of publicly available data/ information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of loss of profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this article. "ABOVE ILLUSTRATIONS ARE ONLY FOR UNDERSTANDING, IT IS NOT DIRECTLY OR INDIRECTLY RELATED TO THE PERFORMANCE OF ANY SCHEME OF NIMF. THE VIEWS EXPRESSED HEREIN CONSTITUTE ONLY THE OPINIONS AND DO NOT CONSTITUTE ANY GUIDELINES OR RECOMMENDATION ON ANY COURSE OF ACTION TO BE FOLLOWED BY THE READER. THIS INFORMATION IS MEANT FOR GENERAL READING PURPOSES ONLY AND IS NOT MEANT TO SERVE AS A PROFESSIONAL GUIDE FOR THE READERS."

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