Portfolio turnover ratio in mutual funds
Portfolio turnover ratio measures how frequently a mutual fund manager buys and sells securities, expressed as an annual percentage of the portfolio. It indicates the trading intensity of the fund.
Calculation
Portfolio turnover = Min(Buys, Sells) / Average AUM × 100
Where:
- Buys: Total value of securities purchased during the year.
- Sells: Total value of securities sold during the year.
- Average AUM: Average scheme AUM over the period.
A turnover of 100% means the fund effectively replaced the entire portfolio once during the year.
Typical ranges
| Scheme Category | Typical Turnover |
|---|---|
| Index fund | 5-20% (only on index rebalancing) |
| Large-cap fund | 30-100% |
| Mid-cap fund | 50-150% |
| Small-cap fund | 50-200% |
| Sectoral/thematic | 100-300% |
| Quant funds | 200-500% |
Higher turnover indicates more active trading; lower turnover indicates buy-and-hold style.
Impact on costs
High turnover increases:
- Brokerage costs: Each buy/sell incurs transaction costs.
- STT (Securities Transaction Tax): 0.001% per equity sell.
- Stamp duty: 0.015% per buy.
- Bid-ask spread costs: Particularly for less-liquid stocks.
These costs come out of scheme returns, indirectly reducing investor returns. However, these costs are not part of TER (they are factored into NAV directly).
Impact on taxes
Within the mutual fund scheme:
- The scheme itself is not taxed on its trades.
- Capital gains/losses at scheme level affect NAV.
- The investor pays tax only on their own buy/sell, not on the scheme’s internal trades.
So portfolio turnover doesn’t directly create tax events for the investor (unlike direct stock investing).
Interpretation
Active management style
- Low turnover (<30%): Buy-and-hold style; concentrated long-term positions.
- Moderate turnover (30-100%): Active position management.
- High turnover (>100%): Aggressive trading; momentum or quant style.
Performance correlation
Empirical evidence is mixed:
- Some high-turnover funds: Underperform due to costs and friction.
- Some high-turnover funds: Outperform through active alpha capture.
- Most index funds: Naturally low turnover.
For most retail investors, lower turnover is preferable for cost efficiency.
See also
- Mutual funds in India
- Alpha mutual fund
- Tracking error
- TER regulation and slabs
- Total Expense Ratio (TER)
- Active vs passive equity in India
- Index fund India
- Quant Mutual Fund
External references
References
- AMFI factsheet guidelines on portfolio turnover disclosure.
- SEBI (Mutual Funds) Regulations 1996.