What is it?
This ratio shows how frequently your fund churns its portfolio. A higher ratio means the churning happens frequently. It is expressed in percentage terms.
How is it calculated?
Take the total value of the new shares purchased or the total value of the shares sold, whichever is less, and divide it by the average net assets of the scheme. Multiply the result with 100 to get the percentage figure. For instance, suppose the value of the entire purchase made by a scheme is Rs 2 lakh (and this value is less than what the fund sold) and the average net assets of the scheme is Rs 4 lakh. Divide 200,000 by 400,000 and multiply it with 100: the result would be 50%. This means that 50% of the fund’s portfolio is changed every year.
What is its significance?
The higher the ratio, the higher would be the brokerage that investors pay. Every time a mutual fund buys and sells shares, a charge gets deducted from the net asset value or NAV of your scheme.
When is this ratio high?
When markets are volatile, fund managers buy and sell frequently and that increases this ratio. Typically, when the market moves up, mutual funds shift to aggressive stocks. In sharp contrast, when the market goes down, they shift to defensive stock. Hence, the frequency in buying and selling.
Short-term investment decisions taken by various fund managers also leads to a higher ratio.
Are schemes with low ratio better?
Not necessarily so. A low ratio may sometimes imply that the fund manager is not reacting to changing market situations. This may, in turn, affect the overall performance of the fund. According to mutual fund managers, an average turnover ratio of 75-175% is considered okay.
How to find out your scheme’s ratio
The capital markets regulator, the Securities and Exchange Board of India, has mandated mutual fund companies to announce the ratio on a half-yearly basis in their results. You will find this information on the company’s website.