Understand portfolio turnover in mutual funds


Any fund manager who oversees a mutual fund will constantly rebalance their portfolio to get rid of underperformers, take profits on stocks, buy potential bets, rebalance holdings, or align with a particular strategy. However, portfolio turnover may increase costs for investors due to the periodic buying and selling. There are also concerns about why a fund manager sometimes switches too much or too little. Because of this, investors need to keep an eye on a fund’s churn as measured by its portfolio turnover ratio.

measure churn

The portfolio turnover ratio indicates the frequency of changes in the fund manager’s portfolio. The smaller number of shares bought or sold in a year divided by the average assets under management (AUM) gives the turnover ratio. Let’s say a fund bought shares worth 1,000 crore in 2022 and sold them for 1,200 crore. If his average assets under management is ₹10,000 crore in 2022, the portfolio turnover ratio is 0.1, or 10 percent. You can find the Portfolio Turnover Ratio of a specific system in its fact sheet.

A fund’s turnover rate may also be affected by investors’ inflows/outflows from Corpus and the use of derivatives.

Portfolio turnover between the systems

The portfolio turnover ratio should generally be used for actively managed equity-oriented systems. In the case of debt funds, there is a modest exodus depending on inflation and interest rate movements.

According to Value Research data, the average portfolio turnover for active large-cap MF spaces is 48 percent. Out of 30 actively traded large-cap mutual funds, about 27 percent of MFs have ratios between 10 and 30 percent, with funds such as IDBI India Top 100 Equity Fund (12 percent), SBI Bluechip Fund (13 percent), and Kotak Bluechip Fund (14 percent ). Five funds. That said, about 17 percent of the funds in this space have a value greater than 80 percent, including funds like the Quant Large Cap Fund (118 percent), the Mahindra Manulife Large Cap Fund (106 percent), and the Taurus Large Cap Equity Fund ( 97 percent).

In the mid-cap space, five out of 25 funds have a ratio of more than 80 percent, including Mahindra (138 percent), Taurus (127 percent) and Motilal Oswal (100 percent). Eleven funds have a portfolio turnover of up to 30 percent, including funds from Kotak (2.87 percent), JM (4.69 percent) and IDBI (7 percent). Average portfolio turnover last year was 49 percent for the category.

In the small-cap space, 13 of the 25 funds have a ratio of less than 30 percent, including funds such as Tata Small Cap Fund (5.7 percent), Canara Robeco Small Cap Fund (6 percent), and Axis Small Cap Fund (6 percent). ), while only two PGIM Small Cap Fund and Union Small Cap Fund hold 100 percent. Here, the average turnover for the category was around 30 percent.

Could churn lead to better returns?

There have been funds like the Quant Midcap Cap Fund, the best performer in the category by consistently delivering a CAGR return of about 37 percent on turnover in excess of 100 percent over the past three years. On the other hand, funds like SBI Blue Chip, one of the best-performing funds in this category, produced a CAGR return of about 20 percent on sales of only about 15 to 20 percent over the period. Therefore, there is no proven link between sales and returns.

However, this suggests that a fund manager who is able to generate above-average returns with lower turnover could be confident in his strategy. Although high portfolio turnover may not guarantee returns above the category average, the costs involved are expected to do so. Each time a mutual fund buys and sells securities, there are costs such as brokerage fees and securities transaction taxes. Therefore, if a fund manager is involved in higher trading activity, it is expected that the mutual fund is likely to generate high-risk, risk-adjusted returns to offset these costs.

Ultimately, portfolio turnover ratio can be seen as a key factor in analyzing mutual funds and understanding a fund manager’s strategy. However, investment decisions should not be made solely on the basis of portfolio turnover, and investors need to consider other metrics as well.

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