Portfolio Turnover Ratio (2024)

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Article Content

  1. What is Portfolio Turnover Ratio?
  2. How to Calculate Portfolio Turnover Ratio?
  3. Interpretation of Portfolio Turnover Ratio in Mutual Fund Investment
  4. High vs Low Portfolio Turnover Ratio in Mutual Funds

What is Portfolio Turnover Ratio?

The Portfolio Turnover Ratio or PTR indicates the rate at which the fund managers buy or sell portfolio holdings of a mutual fund. In other words, the portfolio turnover ratio shows the percentage change of assets in a mutual fund over one year. Also, this ratio is expressed in the form of a percentage. Therefore, PTR gives an idea about the overall fund management style.

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You can also understand the functioning of a mutual fund by looking at the portfolio turnover ratio. Moreover, this ratio is available in the monthly fact sheet of the mutual fund scheme.

How to Calculate Portfolio Turnover Ratio?

It is a very simple method to determine the portfolio turnover ratio. To calculate this ratio, you can consider the minimum number of securities either purchased or sold (whichever is lesser) and divide it by average assets under management (AUM). The securities and also AUM should be of the same period. Also, the time horizon can be monthly or yearly.

Formula

Portfolio Turnover Ratio = Minimum securities bought or sold / Average AUM of the fund.

Example

Suppose for an ABC equity mutual fund; the fund manager purchases stock worth Rs. 300 crores and sells stocks worth Rs. 400 crores. The average AUM of the fund is Rs. 1200 crores. The portfolio turnover ratio is –

PTR = Rs. ( 300 / 1200) crores = 25%

Therefore, the portfolio turnover ratio of the fund is 25% which indicates that one-fourth of the portfolio securities were traded.

Interpretation of Portfolio Turnover Ratio in Mutual Fund Investment

The portfolio turnover ratio is one of the important metrics for mutual fund investment

  • The PTR provides clues about the investment strategy that the fund manager uses to generate returns. Also, a low PTR indicates a buy-and-hold strategy where the fund manager is confident about the security purchases. Furthermore, he holds these securities for a fixed time horizon. Therefore, the fund will have a low expense ratio owing to the low transaction costs. Sometimes, the lower ratio also could be due to the fund category.
  • For passive mutual funds, the fund manager merely matches the fund portfolio composition with the benchmark index. As a result, there is a low portfolio turnover ratio due to low trading activity. On the other hand, funds with high PTR show aggressive trading activity.
  • For active mutual funds, the fund manager follows an active investing strategy where he buys and sells securities to take advantage of the changing market situations. Also, aggressive trading activity results in a high expense ratio. Therefore, funds with dynamic asset allocation will relatively have a high expense ratio.
  • The level of portfolio turnover ratio depends on the market conditions. During the volatile market, the fund manager will hold tight and keep the ratio low. On the other hand, when the market rallies, it encourages the fund manager to indulge in trading, which increases the PTR. Hence, the fund manager keeps trading to maintain the ideal portfolio returns rate.
  • The continuous trading activity involves transaction costs. Also, this cost is added to the expense ratio, which often affects the mutual fund portfolio returns. Furthermore, investors tend to face losses in capital due to higher expense ratios. As a result, they end up paying higher management costs without getting good returns.

High vs Low Portfolio Turnover Ratio in Mutual Funds

The High vs Low Portfolio Turnover Ratio helps to understand the fund’s activities.

ParametersHigh PTRLow PTR
ChurningThere is a high frequency of buying and selling of portfolio holdings over a time period.There is low frequency of buying and selling of portfolio holdings over a time period.
CostA higher PTR has higher transaction costs making the fund management expensive. This cost has a direct impact on the fund returns.A lower PTR has low transaction costs and makes fund management less expensive. The fund returns are not much affected by the management cost.
Expense RatioHighLow
Type of schemeHigh PTR is more common for actively managed funds.Low PTR can be a strategic decision or common for passively managed funds.
Investment strategyA relatively more aggressive strategy due to high churning of securities.A buy and hold strategy for the portfolio.
Market conditionMarket volatility becomes a reason for high turnover for securities.This situation reflects the fund manager’s confidence to buy and hold securities.

To conclude, investors must understand all factors that influence mutual fund portfolio returns. Also, PTR should be used with other ratios while analysing and comparing mutual funds. Certainly, each investor has their own investment objective, investment horizon and risk tolerance levels. Therefore, a portfolio turnover ratio helps the investor to choose the investment option by balancing their risk tolerance level with the fund’s risk level.

Discover More

  • Gross Profit Ratio
  • Mutual Fund Performance Ratios
  • Activity Ratios
  • Asset Turnover Ratio
  • Accounts Receivable Turnover Ratio
  • Profitability Ratios
  • What is Sharpe Ratio?
  • What is Current Ratio?
  • Dividend Payout Ratio
  • Net Profit Margin

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FAQs

What is a good portfolio turnover ratio? ›

Index funds should not have a turnover rate higher than 20% to 30% since securities should only be added or removed from the fund when the underlying index makes a change in its holdings; a rate higher than 30% suggests the fund is poorly managed.

What is a good turnover ratio? ›

For most industries, the ideal inventory turnover ratio will be between 5 and 10, meaning the company will sell and restock inventory roughly every one to two months. For industries with perishable goods, such as florists and grocers, the ideal ratio will be higher to prevent inventory losses to spoilage.

Do you want high or low portfolio turnover? ›

Generally speaking, a low turnover ratio is desirable over a high turnover ratio. The rationale is that there are transaction costs involved with making trades (buying and selling securities). In addition, funds with a higher portfolio turnover ratio are more likely to incur higher capital gains taxes.

What is considered a high turnover ratio? ›

Typically, high turnover means 28% of your new employees quit within the first 90 days of their employment. (Again: this presents an enormous cost to companies because they have to constantly repeat a cycle of recruitment, hiring, and training new people.)

Is 0.5 asset turnover ratio good? ›

In the retail sector, an asset turnover ratio of 2.5 or more could be considered good, while a company in the utilities sector is more likely to aim for an asset turnover ratio that's between 0.25 and 0.5.

Is 2 a good turnover ratio? ›

A good inventory turnover ratio is typically between 4 and 8 for most industries. While the optimal ratio may vary depending on your industry, this range generally indicates a good balance between stock replenishment and sales numbers.

Is a high portfolio turnover rate good? ›

Implications of portfolio turnover

A high portfolio turnover implies that the fund manager is looking to book profits and enter stocks at lower prices. A low portfolio turnover ratio indicates the fund manager's strong conviction about his stock picks; this is a 'buy and hold' strategy. It also results in lower costs.

What is a bad turnover ratio? ›

While organizations should aim for a 10 percent employee turnover rate, the national average in 2021 was slightly more than 47 percent.

Is 100% turnover rate bad? ›

It is possible for your turnover rate to be more than 100%. This means that you replaced your entire workforce during that time period. As a general rule of thumb, a turnover rate higher than 20% is a sign that something is probably wrong with your work environment.

What is an example of a portfolio turnover ratio? ›

If a fund has a portfolio turnover ratio of 25%, that would mean that 25% of its securities were sold/bought in the previous year. Thus, a higher portfolio turnover ratio implies that the fund manager is changing the holdings at a higher rate and vice versa.

Is high portfolio turnover bad? ›

High-portfolio turnover strategies aren't all bad; in fact, many momentum-focused funds bake that into their approach. However, it's important for investors to determine the level of turnover with which they're comfortable.

Is a higher turnover ratio better? ›

Generally, the higher the ratio, the better. A low inventory turnover ratio might be a sign of weak sales or excessive inventory, also known as overstocking. It could indicate a problem with a retail chain's merchandising strategy or inadequate marketing.

Why is high turnover ratio bad? ›

Constant employee turnover could lead to project stoppages or even cancellations, which could completely affect the business strategy. In addition, staff turnover makes it much more difficult to implement new initiatives. Not only because of the lack of workers, but also because of the barriers that new hires may pose.

What is turnover ratio in simple words? ›

A turnover ratio represents the amount of assets or liabilities that a company replaces in relation to its sales. The concept is useful for determining the efficiency with which a business utilizes its assets.

Is 1.2 a good asset turnover ratio? ›

For instance, if a company has an asset turnover ratio of 0.8, which is lower than the industry average of 1.2, it may indicate that the company is lagging behind its competitors in terms of asset utilization.

Is 1.4 a good asset turnover ratio? ›

All told, for the asset turnover ratio, the higher, the better. A higher number indicates that you're using your assets efficiently. For instance, an asset turnover ratio of 1.4 means you're generating $1.40 of sales for every dollar of assets your business has.

Is 0.9 a good asset turnover ratio? ›

If the industry average generally falls below 0.5, and the company's ratio is 0.9, it can be considered as performing well despite having a lower asset turnover compared to the industry average.

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