You need to know the portfolio turnover ratio. It is the only way to make good choices with your money. This number shows how many times a fund manager buys and sells stocks. This buying and selling always costs you money from fees and taxes.
The Portfolio Turnover Ratio is a percentage. It shows how much of a fund’s stocks were changed in one year. This number tells you if the manager is very active. For example, a fund has ₹100 crore. The manager buys and sells ₹50 crore of stocks. The turnover ratio is 50%.
This ratio tells you the manager’s real plan. Good managers have low turnover ratios. Bad managers who trade too much have high ratios. They are always changing the stocks.
Table of Contents
Understanding Portfolio Turnover
How Portfolio Turnover Measures Fund Activity
Portfolio turnover shows how fast a fund is trading stocks. It counts all the buying and selling. It shows you the manager’s style and how much they trade. This number proves if a manager has a good “buy and hold” plan or a bad, risky plan.
Good fund managers believe in their stocks. They always have low turnover ratios. This is the best way to invest. Managers who are always changing stocks have high ratios. This is a very bad sign.
Types of Turnover Ratios
High Turnover Ratio Characteristics
A high turnover ratio is anything over 70%. It means the manager is too risky with your money. Many funds have a turnover ratio over 100%. This is terrible. For example, the Shriram Flexi Cap Fund has a very high 806% turnover ratio. The Shriram ELSS Tax Saver Fund has a 652% ratio.
These big numbers mean the manager is just guessing. They want to make fast money. But this only creates big costs for you to pay.
Low Turnover Ratio Benefits
Low turnover ratios are good. Look for a ratio below 30%. It means the manager has a smart, patient plan. This is what you want. These funds save you money. They have low fees for trading. Index funds and passive funds always have low turnover ratios. They are usually below 20%.
A low turnover plan is the best way to invest. The famous investor Warren Buffett does this. He owns good stocks for a long time. This plan lowers your taxes and trading costs.
Portfolio Turnover Calculation and Analysis
How is Portfolio Turnover Ratio Calculated?
It is easy to find this number. You look at the total stocks the fund bought in a year. You look at the total stocks the fund sold in a year. The formula uses the smaller of these two numbers. This is the right way to do it. It stops people from counting a trade two times.
Portfolio Turnover Formula with Examples
Portfolio Turnover Ratio = (The smaller number: total buys or total sells) ÷ Average money in the fund × 100
Here is an example:
- Fund buys: ₹100 crore
- Fund sells: ₹80 crore
- Average money in the fund: ₹500 crore
- Turnover Ratio = ₹80 crore ÷ ₹500 crore × 100 = 16%
Here is another one: A fund has ₹620 crore in buys. It has ₹730 crore in sells. The average money is ₹1,200 crore. The turnover is: ₹620 crore ÷ ₹1,200 crore × 100 = 51.7%
Interpreting Turnover Percentage Results
Securities Bought vs Securities Sold Impact
The formula always uses the smaller number between buying and selling. This is very important. It stops the turnover number from looking too big. It shows you the real number of stocks that were changed.
Average Net Assets in Turnover Calculation
The formula uses the average amount of money in the fund. The average number is better. It helps to smooth out any big changes in the fund’s money during the year. This gives you the real turnover number.
High vs Low Portfolio Turnover Comparison
Active Management and High Turnover Funds
These funds always have turnover ratios between 50% and 150%. The managers say they can beat the market by picking stocks. But their work just leads to too much trading. This trading costs you money.
Passive Management and Low Turnover Strategy
Passive funds are the best choice. These include index funds and ETFs. They always have very low turnover ratios, below 20%. These funds just follow the market. So, they do not trade very much. This means lower costs for you. This is the best plan.
Portfolio Turnover Impact on Investment Decisions
How Does Turnover Affect Mutual Fund Returns?
Portfolio turnover is bad for your money. A high turnover means more costs from trading, hidden fees, and bigger tax bills. Too much turnover always hurts your profits.
Transaction Costs and Expense Ratios
A lot of trading costs you money. You pay fees to brokers and other costs. These costs make the fund’s expense ratio go up. A high expense ratio means less money for you. It’s a fact: a high portfolio turnover always means a high expense ratio.
Tax Implications of Portfolio Turnover
Short-term vs Long-term Capital Gains
High turnover creates a lot of short-term capital gains. This is bad for you. The tax on these gains is very high. A low turnover plan is smart. It creates long-term capital gains. The tax on these is much lower.
Tax Efficiency in Low Turnover Funds
If you own stocks for more than one year, the tax is low. Long-term capital gains over ₹1.25 lakh are taxed at only 12.5%. This saves you a lot of money in taxes. Low turnover funds are the best choice for long-term investors.
Fund Management Style Analysis
The portfolio turnover ratio shows you if a manager is good or bad. A low and steady turnover ratio is good. It means the manager has a clear plan. A high or changing ratio is bad. It means the manager is just guessing with your money.
Choosing Funds Based on Turnover Ratios
Always compare the turnover ratios of funds in the same group. A passive fund must have a turnover below 20%. There are no excuses. An active fund can have a higher ratio. But it must make much more money than other funds after all costs and taxes. This rarely happens.
FAQ
What is a good portfolio turnover ratio for mutual funds?
The best ratio depends on the plan. Passive funds must be below 20%. Active funds can be between 50% and 100%. But they must prove they make you more money. Always be careful.
How does high turnover affect mutual fund performance?
High turnover hurts a fund’s final result. It means more costs and taxes. This always eats your profits. A manager may say they can beat these costs, but that is very rare. Do not take that risk.
Why do some funds have turnover ratios above 100%?
A turnover ratio over 100% means the manager sold everything and bought new stocks in one year. This is a sign of a very risky plan. Or it can mean many people are taking their money out of the fund. All of these are bad signs.
Should I avoid funds with high portfolio turnover?
Yes. You must avoid funds with high portfolio turnover. Only think about it if the fund has made more money than all others for a very long time, after all costs and taxes. You must check the real numbers yourself. Never just trust the fund manager.
How often should I check a fund’s turnover ratio?
Check this ratio one time every year. That is all you need. Look for big changes. A good fund has a ratio that stays the same. If the ratio goes up and down, the manager’s plan is not working. You must sell the fund.
