What is turnover ratio in mutual funds?

By Ambari Datta Gupta

Updated: Thursday, July 24, 2014, 15:21 [IST]

Turnover ratio with respect to mutual funds is a measure showing how many times a company's fund assets has been replaced in a given period of time. For example, a mutual fund invests in 100 different stock and it replaces 75 of them for a given period of time, then the turnover ratio of the mutual fund is 75 per cent.

Factors like the type of mutual fund, objective of the fund and style of investment of the find manager plays a key role in determining the ratio. If the turnover ratio is high then they have higher expenses thus eroding off the returns.

On the other hand, mutual funds with lower turnover ratio has lower trading costs and lower tax costs too. They generally give higher net returns. It also implies a buy and hold strategy of the fund manager.

Typically, bond funds and small-cap stock funds have high turnover ratio. While funds like index funds have lower turnover ratio. The turnover ratio vary from one year to another year.

For mutual funds, lower turnover ratio means when turnover ratio is between 20 - 30 per cent. If the turnover ratio is 50 per cent then it means the mutual fund has higher turnover ratio.

If you invest in mutual funds then you receive the dividend income which is tax exempted. But if the dividend is reinvested and then units are sold at NAV (net asset value) then capital gains tax is levied. To know more about taxation on mutual funds click here.

Mutual funds can be of different types like open ended funds, close ended funds, interval funds. To know more about different types of mutual funds to choose from while investing click here.

Conclusion

If you invest in mutual funds then you must have an idea of your risk tolerance level and investment objective. Then you should buy the fund which suits you.

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