Portfolio Turnover

Portfolio Turnover

Portfolio turnover is a measure of how frequently assets in a mutual fund are bought and sold over a given period of time, usually a year. In simple terms, it represents the percentage of the total assets in a fund that have been replaced with new investments during the specified period. A mutual fund manager may decide to sell some of the existing holdings in the fund’s portfolio and purchase new securities to maintain the desired asset allocation, to capitalize on market opportunities, or to manage risks. Portfolio turnover is an important consideration for investors because it affects the performance and cost of investing in a mutual fund.

A high portfolio turnover rate implies that the fund’s manager frequently buys and sells securities in the portfolio, resulting in higher transaction costs, such as brokerage fees and bid-ask spreads, which can reduce the fund’s returns. Furthermore, short-term capital gains taxes may be incurred on securities that are held for less than a year. In contrast, a low portfolio turnover rate suggests that the fund’s manager holds securities for a longer period, reducing the transaction costs and tax liabilities. However, a low portfolio turnover rate can also indicate that the fund is less actively managed and may miss out on potential gains or fail to react to changes in the market. Investors should consider a mutual fund’s portfolio turnover rate along with other factors such as its investment objectives, fees, and past performance when selecting a fund. A high portfolio turnover rate may be appropriate for some investors who seek more active management and are willing to pay higher costs for potentially higher returns. In contrast, investors who prioritize lower costs and tax efficiency may prefer a fund with a low portfolio turnover rate. Ultimately, it.

Fund managers keep churning their portfolio depending upon their outlook for the market, sector or company. This churning can be done very frequently or may be done after sufficient time gaps. There is no rule which governs this and it is the mandate of the scheme and the fund managers’ outlook and style that determine the churning. However, what is important to understand is that a very high churning frequency will lead to higher trading and transaction costs, which may eat into investor returns. Portfolio Turnover is the ratio which helps us to find how aggressively the portfolio is being churned.

While churning increases the costs, it does not have any impact on the Expense Ratio, as transaction costs are not considered while calculating expense ratio. Transaction costs are included in the buying & selling price of the scrip by way of brokerage, STT, cess, etc. Thus the portfolio value is computed net of these expenses and hence considering them while calculating Expense Ratio as well would mean recording them twice – which would be incorrect.