Tough market conditions prevalent so far this year have sent the 23 trillion Indian mutual funds industry in a tizzy. With few stocks leading the market rally that has seen benchmark indices touch all-time highs, fund managers have to wait patiently for their strategies to yield dividends.

One outcome of the market mayhem is high turnover ratios of many equity funds. In the past six months, many equity funds’ turnover ratios have gone up. According to data from Value Research, 10 to 15 schemes showed a turnover of at least 200% or more, up from around eight schemes in the months before November 2017. Taurus Large Cap Equity Fund’s turnover ratio was 705% for the year-ended April 2018. Fund houses disclose portfolio turnover ratios every month over the preceding 12-month period.

What is portfolio turnover ratio?

Turnover ratio is a statistic that shows how much your scheme has churned its portfolio, usually over the past 12-month period. When your fund managers tell you to stay invested for a long time, it’s only natural to expect your fund manager to hold on to the stocks over the long term, as well. In reality, that doesn’t always happen. Your fund managers constantly look for opportunities and buy and sell stocks.

Portfolio turnover ratio is calculated by taking the lower of the total sales, or total purchase, and dividing it by the average month-end net assets. These are annual figures, so the result tells the turnover of a scheme over the past one year.

Typically, a turnover ratio of 100% is said to be high. A turnover that is greater than 100% typically means that fund manager has churned the portfolio once, completely. Experts, however, add that what constitutes a high or low portfolio turnover is subjective.

Why have turnover ratios been high?

Some experts we spoke to said that high turnover ratios so far this year have been on account of the fall in mid-cap stocks. The BSE Midcap index has fallen by 10.4% so far this year. Fund managers have been grappling with this fall and are said to have made changes in their underlying portfolios to try and minimise the damage.

The change in classification of what constitutes a mid-cap, small-cap and a large-cap scrip also forced certain schemes such as Taurus Discovery (Midcap) Fund to completely overhaul their portfolios. Taurus Largecap Equity Fund has the highest turnover ratio of 705% as on April 2018. The fund house’s chief, Waqar Naqvi, told us that it saw a lot of inflows and outflows earlier this year as many equity funds rushed to declare dividends to beat the deadline of giving tax-free dividends before the dividend distribution tax in equity funds kicked in, in April 2018. Large inflows and outflows force funds to buy and sell stocks, and that impacts their turnover ratios.

Schemes from Edelweiss Asset Management Ltd also come with high turnover ratios. Four of the top 12 equity funds ranked in terms of turnover ratios belong to Edelweiss AMC, as per Value Research. Dig deeper though and there is a reason behind this. The fund house’s equity schemes consciously uses derivatives to explore miss-pricing opportunities between cash and corresponding futures of the equity market to maximise its returns.

A significant portion of its turnover ratio, the fund house tells us, comes due to derivatives’ strategy. It tells us that the turnover ratio of just its pure equity portion is in line “with the rest of the industry."

Portfolio turnover ratio is a good metric to see how frequently your fund churns its portfolio. But check with your advisor to know the reason.

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