Over 50 equity mutual funds had a portfolio turnover ratio of more than 100% for the last three consecutive months. ETMutualFunds looked at the portfolio turnover ratio of around 266 equity mutual funds for three straight months.
A higher portfolio turnover ratio indicates continuous buying and selling of stocks by the fund managers. The continuous churning of the portfolio by the fund manager increases the costs and drags down the return of the scheme.
Bandhan Large Cap Fund had a portfolio ratio of more than 150% in all 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 portfolio turnover ratio of more than 100% for three continuous months. JM Large Cap Fund and JM Midcap Fund also featured in the list.
Mahindra Manulife Large & Mid Cap Fund had 137%, 159%, and 154% portfolio turnover ratio in June, July, and August respectively. Mirae Asset ELSS Tax Saver Fund also had more than 100% portfolio turnover ratio. Quant Mid Cap Fund and Quant Small Cap Fund also had portfolio turnover ratios of more than 100% for three consecutive months.
With equity mutual funds having high portfolio turnover ratio, 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 & environment,” said Chirag Muni, Executive Director at Anand Rathi Wealth.
He also added that, “Additionally, The turnover ratio is also considered the new inflows being deployed in the market. Therefore, when assessing the turnover ratio, it is important to take into account the inflows in the scheme. If a fund experiences significant inflows and the fund manager is actively investing that cash, this will again impact the turnover ratio. As a result, the turnover ratio should not be evaluated in isolation; it should be analyzed alongside inflow dynamics.”
Among these 55 schemes, many schemes had a portfolio turnover ratio of less than 50% for three consecutive months. HDFC Large and Mid Cap Fund had a portfolio turnover of 7.63%, 6.82%, and 6.50% in June, July, and August, respectively.
HDFC Multi Cap Fund also had portfolio turnover of less than 10% for three straight months. Old Bridge Focused Equity Fund had a portfolio turnover of less than 10% in the same time period.
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Now the question is, in the current market scenario, should investors look for schemes with low portfolio turnover, which means schemes with a buy-and-hold approach?
“A low or high portfolio turnover ratio is not the only parameter to access funds- one should pick funds based on future return potential, alpha generation potential, etc. Additionally, Investors should prioritize evaluating fund performance across different market cycles and the fund manager’s agility in adapting to changing market conditions rather than solely focusing on the portfolio turnover ratio,” explained Chirag Muni.
The expert mentioned that though a buy-and-hold approach with low portfolio turnover provide stability but it is equally important to how actively managed funds react to market movements or conditions
“A buy-and-hold approach with low turnover may provide stability & save transaction costs, but it is equally important to consider how actively managed funds respond to market conditions. A fund manager who can adopt various cycles effectively with his active calls may generate better returns & alpha, even if it results in a higher turnover ratio. Ultimately, the focus should be on the fund’s ability to deliver consistent performance and adapt to the changing market conditions & dynamics,” he added.
Among these 55 equity mutual funds, 11 schemes have offered negative returns 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, no equity scheme out of these 55 schemes posted negative returns. In June, Motilal Oswal Midcap Fund gave the highest return of around 14.71%. In July, LIC MF Focused Fund gave the highest return of around 6.30%.
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Looking at the performance of the equity mutual funds during the same period with high portfolio turnover, should investors be concerned about their investments?
“Investors should not be overly concerned about high portfolio churning, as it often reflects a fund manager’s active approach to managing the portfolio. Investors should be focused on diversifying their investments across the AMCs, categories & market caps. This can help them mitigate the performance risk associated with any single fund manager or AMC performance and helps them ride all the market cycles & get exposure across all the sectors in the market,” recommended Chirag Muni.
We considered equity categories such as large cap, mid cap, large & mid cap, small cap, ELSS, flexi cap, focused fund, multi cap, value and contra fund categories. We considered regular and growth schemes.
Note, the above exercise is not a recommendation. One should not make investment or redemption decisions based on the above exercise.
A higher portfolio turnover ratio (PTR) indicates continuous buying and selling of stocks by the fund managers which increases the costs and drags down the return of the scheme. On the other hand, low PTR means a buy-and-hold approach.
(Disclaimer: 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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