![]() ![]() A highly volatile market causes the fund manager to sit tight thereby keeping turnover ratio at low levels. On the contrary, a rallying market encourages fund manager to indulge in frequent trading thereby increasing the portfolio turnover ratio. The level of portfolio turnover ratio also depends on market conditions. Consequently, funds having dynamic asset allocation might have a relatively higher expense ratio. You may witness a high Portfolio turnover ratio in funds following active investing strategy. Aggressive trading entails transaction costs thereby increasing expense ratio of the fund. The fund manager keeps buying and selling the securities to take advantage of the situation. Funds having a high portfolio turnover ratio entail aggressive trading activity. Consequently, there’s not much trading activity resulting in low a portfolio turnover ratio. In passive funds like index funds, the fund manager merely matches the funds’ holdings with that of underlying index. Automatically, such a fund will have a low expense ratio owing to low transaction costs. Low portfolio turnover ratio might also be due to the fund category. Moreover, he plans to hold them for the entire investment horizon of the fund. It means that the fund manager is confident about his stock purchases. It reveals which kind of strategy the fund manager is using to generate returns on investment. A low turnover ratio indicates a buy and hold strategy. Portfolio turnover ratio can provide clues about the manner of fund management. What is the importance of Portfolio Turnover Ratio? Hence, the Portfolio Turnover Ratio of the fund is 25%. It means that 25% or one-fourth of the assets of the portfolio were churned over the last one year. The average AUM of the fund is Rs 1200 crore. ![]() In the same year, it sold Rs 400 crore of equity shares. Suppose the equity fund purchased Rs 300 crore of equity shares. It is calculated by dividing the lesser of purchases/sales by average asset under management (AUM). You may find it in the monthly fact sheet of a mutual fund scheme. However, there’s a simple formula which you may use to determine a fund’s Portfolio Turnover Ratio. You can understand the entire functioning of the fund by looking at the PTR. It gives an idea about the fund manager’s overall investment strategy. In other words, you may perceive it as turning over of asset under management. It is expressed in percentage terms. PTR provides insights about a lot of things. ![]() And that’s before accounting for inflation.Portfolio Turnover Ratio indicates the frequency with which the fund’s holdings have changed over the past one year. If the fees total 3%, the fund has to earn 3% just for you to break even. These fees have to be paid even when you lose money in the fund. These fees include advisory fees, operating expenses, sales costs, and marketing and other fees. If your funds are going to be held in a taxable account, you may want to consider “tax-managed funds” that engage in strategic trading to minimize taxes.Īccording to Stephan Horan of the CFA (Certified Financial Analyst) Institute, the trading costs of stock funds amount to 2–3% of assets each year. These capital gains could be passed on to the fund’s shareholders through higher fees being paid from the fund’s income. Funds with a low turnover rates also offer significant tax savings considering that each time a fund manager sells a stock or bond, he must report the income earned as a taxable gain. Because using speculation, and gambling to manage funds is a poor investment philosophy, it’s wise to be wary of funds with a high turnover ratio.Ĭonversely, a fund with a low turnover rate incurs fewer transaction fees and is more likely to be operated by a fund manager who is tracking the market. A fund with a higher turnover ratio purchases and sells more stocks, bonds, and other financial instruments during a given period than a fund with a lower turnover ratio. ![]()
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