![]() ![]() Say the expense ratio and portfolio turnover ratio is high but the returns are not commensurate, then it will indicate that there is some mismanagement of the fund by the fund manager. Also enables one to assess discrepancies.It will also influence the expense ratio of the fund.It reveals the fund manager’s strategy.It provides an accurate picture about fund management.A low turnover rate is generally considered a good sign when evaluating an index fund. As a result, they have a low turnover rate as the fund managers don’t change stocks frequently to optimise the performance. Index funds are typically classified as passively managed funds. Portfolio turnover ratio and its relationship with Index funds The differences in two figures of the portfolio ratio after a period of time is indicative of the changes in the investment strategy of the fund manager over the said period. If there is a higher portfolio turnover ratio, then it implies that there is a higher churning of the assets in the portfolio, that there are higher costs involved in the fund’s management and that the market condition is dynamic. To put things into perspective, a portfolio turnover ratio is considered to be low if it amounts to less than 30%.Ī high turnover ratio is only justifiable if the fund manager ensures there are higher returns. The lower the turnover ratio, the more beneficial it is, as the capital gains tax incurred would be lesser due to the lower transaction costs. The ratio affects the investment return of the fund – a lower turnover ratio is desired as that would mean lesser costs. (10 Million / 50 million) x 100 = which is 20% Implications of Changes in Portfolio Turnover Ratio With these numbers, the turnover ratio for this mutual fund would be calculated as: The net assets of this fund (on average) were worth Rs 50 million. Let’s look at an example to understand this better:Ī mutual fund has sold Rs 10 million worth of assets in one year. Average Net Assets is the average monthly sum of total assets.Minimum of Securities moved is the total amount of new securities purchases in the reference period.Portfolio Turnover Ratio = Minimum of Securities Bought or sold/ Average Net Assets * 100.Any other figure less than 100% indicates that part of the portfolio that has undergone change in the last one year.īy nature, passively managed funds have a lower portfolio turnover ratio as against actively managed funds as passively managed funds try to replicate the index as closely as possible and components of an index don’t change often. For instance, if the mutual fund you’re evaluating has 200 stocks, and has changed 100 stocks in the past year, then it means it has a portfolio turnover ratio of 50%.Ī ratio of 100% or greater indicates that all the securities in the fund were either sold or replaced with other holdings over a one-year period. The portfolio turnover ratio is defined as the rate at which portfolio managers change assets in a fund portfolio over a year. 8 FAQs What is a portfolio turnover ratio? ![]()
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