Portfolio Turnover Ratio
Definition:
Portfolio Turnover Ratio is the percentage of a fund's holdings that have changed in a given year. This ratio measures the fund's trading activity, which is computed by taking the lesser of purchases or sales and dividing by average monthly net assets.
Computation:
Portfolio turnover is calculated by taking either the total amount of new securities purchased or the amount of securities sold, whichever is less over a particular period, divided by the total net asset value (NAV) of the fund.
This is method used globally.
Example:
If a fund's net assets total Rs 100 crore and the fund bought 150 crores and sold Rs 100 crore worth of securities that year, its portfolio turnover rate would be 100%.
Significance
· If the portfolio is churned many times during a year, the fund will incur higher transaction costs.
· Aggressively managed funds generally have higher portfolio turnover rates than conservative funds. A low turnover figure (30% to 50%) would indicate a buy-and-hold strategy.
· A turnover ratio of 100% or more does not necessarily suggest that all securities in the portfolio have been traded.
Use Portfolio Turnover Ratio in conjunction with other ratios and parameters to evaluate mutual fund schemes.
We will explain Tracking Error and its significance in the next article.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.