A Portfolio Turnover Ratio is a very important factor to analyze an equity mutual fund scheme. When equity markets are highly volatile than even the fund managers are not able to take long positions and they buy/sell stocks very frequently. This frequent churning is either to grab opportunities for generating high returns or move out from the stocks if there is a fear of its underperformance. Many a times this strategy pays off while sometimes it may fire back.
Whatever be the situation a portfolio turnover ratio signifies a specific strategy for your mutual funds scheme which impact its performance and which you should be well aware of.
Let’s understand about portfolio turnover ratio and its impact on the performance of a mutual funds scheme:
What is Portfolio Turnover Ratio?
In all mutual funds factsheet the portfolio turnover ratio will be mentioned along with other financial ratios. This specific ratio determines how frequently the stocks in the scheme portfolio have been sold and bought by the fund manager. But in your factsheet this is generally mentioned in % terms which tells you how much of the total portfolio is being churned in a year. So if the portfolio turnover ratio is 50% then it simply means that 50% of the total portfolio is churned by the team in one year. A 100% or higher PTR means the entire portfolio is churned in a year.
How It Is Calculated?
In general you do not see the calculation but the ratio illustrated in % terms.The portfolio turnover is calculated by taking the total amount of stocks bought or sold in a year divided by the corpus of the mutual fund scheme minus all expenses. The resultant number is the portfolio turnover ratio. So if you get 25% as the ratio then it simply means that on an average 25% of the portfolio is churned in a year.
What it Signifies?
A portfolio turnover ratio has a larger significance in the mutual funds scheme you invest. Firstly it is a trading activity and so the transaction cost is involve. The high number of transactions means the higher will be the cost of your fund. Since all cost is being charged from the scheme you as an investor bear this higher transaction cost. As a result you have an impact on your returns since the total expenses of the fund goes higher. So a higher portfolio turnover ratio will lead to increasing the cost of the fund you are invested in which will finally lower down the net returns you earn from it.
How To Interpret It?
The larger question arises is why some funds have a higher turnover ratio and some lower. Most of the times this can be part of the underline strategy of the fund. For example in mid-caps the fund manager cannot hold some of the stocks for really long term and if opportunity arises they may consider exiting some old ones while buying some new ones. This strategy can generate higher returns if it is followed to benefit from the opportunities in the market. Even some of the large cap fund follows this strategy and so some of them have a higher turnover ratio. Surely the idea is to not stick to particular stocks and consider exiting and entering as new opportunities arrive. Below are some of the large cap funds with different turnover ratio:
| Fund | Capitalisation | Market Cap | Turnover | Net Assets (Cr) |
| Birla Sun Life Frontline Equity Fund | Large Cap | 71306.9 | 33 | 7290.29 |
| DSP Blackrock Top 100 Equity Fund – Regular Plan | Large Cap | 75152.29 | 87 | 3474.8 |
| Franklin India Blue-chip Fund | Large Cap | 91207.84 | 23.85 | 5787.41 |
| HDFC Top 200 Fund | Large Cap | 81350.31 | 27.53 | 13669.76 |
| ICICI Prudential Focused Bluechip Equity Fund – Regular Plan | Large Cap | 94974.85 | 58 | 8036.5 |
| ICICI Prudential Top 100 Fund – Regular Plan | Large Cap | 70072.85 | 124 | 1366.77 |
| UTI Equity Fund | Large Cap | 70099.07 | 31.85 | 3770.01 |
Source: Valueresearch
You can clearly see ICICI Prudential Top 100 fund churns its portfolio in a year while Franklin India Bluechip and HDFC Top 200 fund hold majority of their stocks for the long term. You may compare the returns and see whether higher churning is really delivering higher returns than the other funds.
What You Should Do?
Portfolio turnover ratio can easily be one of the parameters when you are judging a mutual fund scheme. Not that it should be considered in isolation but combining with other factors and looking at some past record it should give you enough indication why there is a frequent churning of the stocks in the portfolios. If it is a strategy then it should reflect in the net returns of the fund which is being generated and should be higher. But frequent churning done in a very volatile market can leads to greater losses and so if the net returns are quite low then the alarm bell should be raised. Whatever be the scenario a higher churning will always leads to higher cost in the fund and unless it is followed by higher returns it may not be a wise proposition.
While you are selecting mutual funds scheme for investment, along with other parameters, a portfolio turnover ratio can answer few questions. In funds like large cap buy and hold strategy matters and so a high PTR should be analyzed in detail to see if it is part of an underline strategy.
Do you consider this factor for selecting a mutual funds scheme? If not will you be monitoring it now?
Share your views in the comments section…..
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