32 equity mutual funds had a portfolio turnover rate of less than 10%. Should investors be concerned?

Around 32 equity mutual funds I had a portfolio turnover ratio of less than 10% in July. A deep analysis of the data showed that these 32 stocks mutual funds were of a sectoral/thematic nature (including international funds), flexible cap, multi-cap, large- and mid-cap, and focused fund categories. Most of them belonged to the sector/thematic category.

Two schemes of Tata Mutual Fund – Tata Housing Opportunities Fund and Tata Resources & Energy Fund – had a portfolio turnover rate of 9.79% and 9.73% respectively in July. ICICI Prudential NASDAQ 100 Index Fund had a portfolio turnover of 9% in the same period.

HDFC Multi Cap Fund and HDFC Large and Mid Cap Fund had a portfolio turnover of 7.44% and 6.82% respectively. Two funds of UTI Mutual Fund (UTI Flexi Cap Fund and UTI Innovation Fund) had a portfolio turnover of 6% each in July.

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Two international funds – Motilal Oswal S&P 500 Index Fund and Nippon India US Equity Opp Fund – maintained a portfolio turnover of 5% each in July. Baroda BNP Paribas Manufacturing Fund, a manufacturing-themed fund, had a portfolio turnover of 2% in July. Aditya Birla SL Global Emerging Opp Fund and Aditya Birla SL Global Excellence Equity FoF had the lowest portfolio turnover rate at 0.20% and 0.06% respectively.

How should an investor interpret this low portfolio turnover ratio?

“Portfolio turnover ratio cannot be an absolute measure to interpret the quality of the portfolio or the performance potential of the fund. It is just one of the measures to assess whether the fund is moving in the right direction. Instead, what investors should look at while evaluating the portfolio is whether companies that have been in the portfolio for a long time but have not performed well are still part of the portfolio. Have the fund managers made changes in them or not? Even with low portfolio turnover, some of these funds have performed well over a period of one month. So, there is nothing that should be very worrying based on this ratio on a standalone basis,” said Chirag Muni, CEO, Anand Rathi Wealth.

Among these 32 equity mutual funds, most of the schemes had a portfolio turnover rate of more than 10% in May and June, while others had a portfolio turnover of less than 10%. ETMutualFunds verified this trend for the last three months (May to July).

Now the question is: should investors be concerned about such a low portfolio turnover ratio?

“Fund managers tend to maintain a low turnover ratio when they are very confident about the stocks in their portfolio. They usually take a time frame of two to three months or more depending on when they are close to meeting their targets. Therefore, this ratio cannot be the only parameter to evaluate a fund,” says Chirag.

He also recommends that “investors should not be concerned about a low portfolio turnover rate, as making too many changes to the portfolio can also lead to undesirable results.”

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In July, out of 32 schemes, 24 schemes gave positive returns and eight schemes gave negative returns. HSBC Global Emerging Markets Fund was the biggest loser at around 2.57%. Franklin India Feeder – Franklin US Opportunities Fund lost 2.23%. ICICI Prudential NASDAQ 100 Index Fund lost around 1.94% in July.

The Kotak Technology Fund returned the highest return of around 9.11 per cent in July, followed by the Baroda BNP Paribas Aqua FoF which returned 8.86 per cent and the Old Bridge Focused Equity Fund which returned 6.69 per cent.

Two other funds – SBI Small Cap Fund and ICICI Prudential US Bluechip Equity Fund – which had a portfolio turnover of 94% and 65% respectively, posted returns of 3.90% and 6.64% respectively in July.

Does low portfolio turnover affect the performance or returns offered by mutual funds?

“There are funds with a portfolio turnover rate of over 50% that offer a return of 10% over a period of one month, and there are funds with a turnover rate of 6% or 12% that offer a return of 9% to 10% over the same period. Therefore, this should not be an absolute parameter to measure the success or failure of a fund,” Chirag said.

For the study, equity and equity-oriented models were considered. Regular and growth schemes were considered.

A higher portfolio turnover ratio (PTR) indicates that fund managers are continuously buying and selling shares, which increases costs and reduces the plan’s profitability. On the other hand, a low PTR means that a buy-and-hold approach is adopted.

(Disclaimer:The recommendations, suggestions, views and opinions of the experts are their own and do not represent the views of The Economic Times.

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