Is a High Portfolio Turnover Ratio in Mutual Fund Good or Bad?

The portfolio turnover ratio is a metric that reveals how frequently a fund’s assets are bought and sold, providing insight into the fund manager’s level of activity. A high ratio often signifies active management, with frequent changes made to capitalize on market movements. Conversely, a low ratio suggests a buy-and-hold strategy commonly associated with passive funds. It is crucial to consider both the ratio and the overall fund strategy when assessing its suitability. 

A portfolio turnover ratio below 30% is considered low, indicating a buy-and-hold strategy. This approach can lead to lower transaction costs and, consequently, a potentially lower expense ratio.  

A low portfolio turnover ratio, suggesting a buy-and-hold approach, can mean lower transaction costs for the fund. This translates to a potentially lower expense ratio, as there are fewer trades to incur fees on. This characteristic is common in passively managed funds or those following value investing strategies that prioritize long-term holding periods. A lower expense ratio, in turn, allows more of your investment to work towards generating returns, making it a potentially more attractive option for cost-conscious investors. 

The funds listed below exhibit low portfolio turnover ratios, suggesting a buy-and-hold strategy: 

Data shown in the table is as on Oct 2023 

These funds follow a buy-and-hold strategy, potentially resulting in lower expense ratios due to reduced transaction costs. 

On the other hand, a high portfolio turnover ratio, as seen in actively managed funds, may lead to higher transaction costs and an inflated expense ratio.  

A high portfolio turnover ratio, indicating frequent buying and selling of holdings, often points towards an actively managed fund. These funds typically incur higher transaction costs due to frequent trades, which could inflate the expense ratio. Additionally, actively managed funds might employ market timing strategies or respond to short-term news events, potentially amplifying transaction costs and further pushing up the expense ratio. This ultimately translates to a larger chunk of your investment being eaten away by fees. 

The funds listed below have high portfolio turnover ratios: 

Data shown in the table is as on Oct 2023 

A 100% portfolio turnover ratio implies an average holding period of one year, while ratios above 300% suggest an average holding period of four months. 

It is essential to note that a high portfolio turnover ratio may not be detrimental if a fund consistently delivers higher risk-adjusted returns compared to benchmarks and peers. However, if the fund underperforms in the long term, the additional transaction costs incurred may negatively impact returns. 

It is also important to recognize that lower portfolio turnover does not necessarily equate to better performance. Fund managers may adjust portfolios during market opportunities, potentially increasing the turnover ratio. Additionally, funds with lower assets under management (AUM) may experience higher turnover as fund managers strive to navigate volatile markets. 

Following are the some of the lower AUM funds: 

Data shown in the table is as on Oct 2023 

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.