Portfolio turnover ratio
How much of the portfolio was traded in a year, measured SEBI's way.
The portfolio turnover ratio measures how much of a mutual fund scheme's portfolio was bought and sold during a period, compared with the size of the scheme. A low ratio means the fund manager mostly held on to positions; a high ratio means the portfolio was traded heavily.
SEBI fixes the formula, so every scheme computes it the same way. It is a fact about the scheme's trading behaviour, not a measure of returns or of risk.
SEBI's formula
From the Key Statistics format SEBI prescribes for a scheme's accounts.
- Portfolio turnover
- The lower of total purchases or total sales during the period, divided by the average assets under management for the period.
- Average AUM (AAuM)
- Average daily net assets of the scheme over the same period.
- Why the lower figure
- Using the smaller of buys or sales strips out money that merely came in or went out with investors. Fresh inflows force purchases and redemptions force sales; neither is the manager's choice to churn.
Worked example
Illustrative numbers only, for one equity scheme over one year.
| Item | Amount |
|---|---|
| Average daily net assets | ₹2,000 crore |
| Securities purchased in the year | ₹1,300 crore |
| Securities sold in the year | ₹1,100 crore |
| Lower of purchases and sales | ₹1,100 crore |
| Portfolio turnover ratio | 1,100 ÷ 2,000 = 0.55 times, or 55% |
Reading the number
A turnover of 0.55 times means trades equal to a little over half of the scheme's average size went through in the year. A rough reading, not an official measure: at that pace the average holding stays in the portfolio for a little under two years (1 ÷ 0.55).
SEBI asks schemes to explain what their strategy does to turnover because higher turnover has consequences: higher brokerage and transaction costs, which come out of the scheme and reduce its return. A high ratio is not wrong in itself. A tactical or momentum style will trade more than a buy-and-hold style, and an index fund's turnover depends largely on index changes.
Free account, this exam preselected.
Where an investor finds it
- check_circleThe Scheme Information Document and the Key Information Memorandum, which must disclose the scheme's portfolio turnover ratio.
- check_circleThe half-yearly portfolio statement of every equity-oriented scheme, as a footnote.
- check_circleThe Key Statistics section of the scheme's annual accounts.
- check_circleThe SID also carries the scheme's portfolio turnover policy and the likely effect of its strategy on turnover.
A different 'turnover' in distributor rules
SEBI also asks AMCs to publish data on large distributors: gross inflows, net inflows, average AUM and the ratio of AUM to gross inflows. Where that data suggests a distributor's 'portfolio turnover' is more than two times the industry average, the AMC must carry out additional due diligence. That is a check on distributors churning their clients, not the scheme's own portfolio turnover ratio.
How V-A tests this
The calculation question gives purchases, sales and average assets. The trap is to add purchases and sales, or to use the larger of the two; SEBI's formula takes the lower one. The concept question asks what a high ratio implies, and the answer is higher transaction costs, not higher risk or better returns.
FAQs
What is portfolio turnover ratio in mutual funds?expand_more
The lower of a scheme's purchases or sales of securities during a period, divided by its average daily net assets over that period. It shows how actively the portfolio was traded.
Is a high portfolio turnover ratio good or bad?expand_more
Neither by itself. It means more trading, which raises brokerage and transaction costs. Whether that is justified depends on the scheme's stated strategy and its results after costs.
How is portfolio turnover ratio calculated?expand_more
Take the smaller of total purchases and total sales for the period and divide it by the average daily net assets for the same period.
Where can I find a fund's portfolio turnover ratio?expand_more
In the scheme's SID and KIM, as a footnote in the half-yearly portfolio of equity-oriented schemes, and in the scheme's annual accounts.
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