Mutual Funds: All About Portfolio Turnover Ratio

The portfolio turnover ratio (PTR) is one of the metrics highlighting the turning over of assets under management (AUM) that provides insight into a fund manager’s strategy in a particular year. Typically, it is indicated in percentage terms. 

For example, if the mutual funds that an investor is evaluating have 300 stocks and have changed 150 stocks in a year, then the PTR in this case is 50%.

The formula for the PTR is as follows: Portfolio turnover ratio is the minimum of assets bought or sold, whichever is less, divided by the AUM and multiplied by 100 to arrive at the ratio. The period under consideration for assets and AUM is required to be the same. In addition, the time horizon to be considered could be monthly or yearly. 

A high PTR indicates high fund churn. Actively managed equity funds or hedge funds tend to have a high PTR. A mutual fund with a higher turnover ratio will also have expense ratios. In addition, tax costs will also be higher for such funds.

On the other hand, a mutual fund with a low PTR signifies that it is sticking with the same stocks. Generally, passively managed funds, including exchange-traded funds (ETFs) have a low PTR.

The reason is in the case of such funds, the underlying holdings are the same as that of the benchmark index it mirrors. As a result, there is not much trading activity, and the funds have a low PTR as a result. Mutual funds with a low PTR mean lower costs to run it.

As an investor, apart from PTR, other metrics such as expense ratios, track record of the fund manager, risk-adjusted returns, and portfolio concentration, among others, are required to be considered.

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