What is Portfolio Turnover Ratio?
Portfolio Turnover Ratio is the percentage of a fund's holdings that have changed in a given year.It measures how frequently securities are bought and sold by the fund managers within a scheme’s portfolio. It is also called portfolio churning ratio.
How is Portfolio Turnover Ratio calculated?
It is calculated by taking a scheme’s sales or purchases value, whichever is lower, and dividing it by the total net asset value of the scheme.
For example: Suppose the value of total purchase amount is Rs. 5 lakh which is lower of the two values i.e. sales or purchase value during the period. The total net asset value is Rs. 5 lakhs during the same period. The turnover ratio is 500,000 / 500,000 = 1.0 or 100 per cent and this figure indicates that the fund manager has shuffled the portfolio once.
What does portfolio turnover signify?
High turnover ratio means greater volatility and higher costs. It also indicates that the fund manager is buying/selling the stock frequently.
Lower turnover ratio means that the fund manager does less “buy & sell” and more “buy & hold”. Other things being equal, this should make the fund more cost efficient and help your investor in the long term.
What is the advantage of Portfolio Turnover Ratio?
Portfolio Turnover Ratio is an important ratio that will indicate the fund manager’s style as also the costs. Use Portfolio Turnover Ratio in conjunction with other ratios and parameters to evaluate mutual fund schemes.