Using a Portfolio Turnover Ratio

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Using a Portfolio Turnover Ratio
Portfolio turnover ratio tells us how frequently does the fund buys and sells the stocks under portfolio. A higher ratio means the trading of stocks take place frequently. It is expressed in percentage terms.

Calculating this is very easy. All you have to do is take the total value of the new shares purchased or the total value of the shares sold, depending on which is less, and divide it by the average net assets under the scheme. Since it is in percentage multiply the result with 100.

For example, suppose the value of the entire purchase made during the period by a scheme is Rs 1 lakh, and this is the lesser of the two values. The average net assets under the scheme over the same period has been Rs 2 lakh.

Now divide the 1,00,000 by 2,00,000 and multiply it with 100: the result would be 50%. This means that 50% of the fund"s portfolio is changed every year.

Higher ratio signifies that the fund has been paying more brokerage charges. Every time a mutual fund implements its decision to buy and sell shares, it gets charged. And this charge is basically an expense for the investor since it is deducted from the NAV .

During high market volatility, fund managers tend to buy and sell quite often and hence the ratio is high. As bulls gain say in the market mutual funds tend to follow aggressive stocks. In contrast, when bears have a major say, they move to defensive stock. This increases the trading frequency.

Fund managers' who take decision based on short-term cues have a high portfolio turnover ratio.

According to the Securities and Exchange Board of India, the capital markets regulator, has clearly laid out the rule that all mutual funds should announce the portfolio turnover ratio on a half-yearly basis along with their results.

Portfolio turnover ratio is a very good way to see the claim of fund managers if they are value investors, often low ratio, it could be high in one or two years but mostly it would be low, or momentum investors (high ratio). 

OneIndia Money

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