A higher portfolio turnover ratio indicates continuous buying and selling of stocks by fund managers. Continued portfolio churn by fund manager increases costs and reduces the profitability of the plan.
Bandhan Large Cap Fund had a portfolio ratio of over 150% in the three months. Baroda BNP Paribas ELSS Tax Saver Fund, an ELSS fund, had a portfolio turnover ratio of more than 100%.
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ITI ELSS Tax Saver Fund and ITI Flexi Cap Fund had a portfolio turnover ratio of more than 100% for three continuous months. JM Large Cap Fund and JM Midcap Fund are also listed.
Mahindra Manulife Large & Mid Cap Fund had a portfolio turnover ratio of 137%, 159% and 154% in June, July and August, respectively. Mirae Asset ELSS Tax Savings Fund It also had a portfolio turnover rate of over 100%. Quant Mid-Cap Fund and Quant Small Cap Fund also had portfolio turnover rates above 100% for three consecutive months.
Since equity mutual funds have a high portfolio turnover rate, how should investors interpret this?
“Investors should consider a high portfolio turnover ratio as an indication that the fund manager is actively managing the portfolio in response to changing market conditions and environment,” said Chirag Muni, CEO of Anand Rathi Wealth.
He further added that, “In addition, the turnover ratio also considers the new entries that are being deployed in the market. Therefore, when evaluating the turnover rate, it is important to consider the entries in the plan. If a fund experiences significant inflows and the fund manager is actively investing that cash, this will again affect the turnover ratio. Consequently, the turnover rate should not be evaluated in isolation; “It must be analyzed together with the dynamics of the inputs.”
Among these 55 plans, many of them had a portfolio turnover rate of less than 50% for three consecutive months. HDFC Large and Mid Cap Fund had portfolio turnover of 7.63%, 6.82% and 6.50% in June, July and August respectively.
HDFC Multi Cap Fund also had a portfolio turnover of less than 10% for three consecutive months. Old Bridge Focused Equity Fund had a portfolio turnover of less than 10% in the same period.
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Now the question is, in the current market scenario, should investors look for schemes with low portfolio turnover, i.e. schemes with a buy and hold approach?
“A low or high portfolio turnover ratio is not the only parameter for accessing funds: funds should be chosen based on future return potential, alpha generation potential, etc. Additionally, investors should prioritize evaluating fund performance across different market cycles and the agility of the fund manager. to adapt to changing market conditions rather than focusing solely on the portfolio turnover ratio,” Chirag Muni explained.
The expert mentioned that while a buy-and-hold approach with low portfolio turnover provides stability, equally important is how actively managed funds react to market movements or conditions.
“A buy-and-hold approach with low turnover can provide stability and save transaction costs, but it is equally important to consider how actively managed funds respond to market conditions. A fund manager who can adopt multiple cycles effectively with their active call options can generate better returns and alpha, even if this results in a higher turnover ratio. Ultimately, the focus should be on the fund’s ability to deliver consistent performance and adapt to changing market conditions and dynamics,” he added.
Among these 55 equity mutual funds, 11 schemes offered negative returns of up to 2% in August. Quant Mid Cap Fund lost 2.02%, followed by Quant ELSS Tax Saver Fund, which lost around 1.92% in the month of August.
In June and July, none of the 55 equity schemes recorded negative returns. In June, the Motilal Oswal Midcap fund had the highest return of around 14.71%. In July, the LIC MF Focused Fund had the highest return of around 6.30%.
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Looking at the performance of equity mutual funds over the same period with high portfolio turnover, should investors be worried about their investments?
“Investors should not be overly concerned about high portfolio turnover as it often reflects the fund manager’s active approach to managing the portfolio. Investors should focus on diversifying their investments across AMCs, categories and market caps. This can help them mitigate the performance risk associated with any fund manager or AMC performance and helps them navigate all market cycles and gain exposure across all market sectors,” recommended Chirag Muni.
We consider categories of stocks such as large cap, mid cap, large and mid cap, small cap, ELSS, flexi cap, focused funds, multicap, value and contra funds. We consider regular and growth schemes.
Please note that the above exercise is not a recommendation. Investment or redemption decisions should not be made based on the previous year.
A higher portfolio turnover ratio (PTR) indicates continuous buying and selling of stocks by fund managers, which increases costs and reduces plan performance. On the other hand, a low PTR means a buy and hold approach.
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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