I would like to know the significance of the turnover ratio of a fund. Which is a better a fund - the one with a higher turnover ratio or a fund with low turnover ratio? Some good four-star funds like ICICI Prudential Dynamic have a very high turnover ratio - more than 100.
- Bhaskar
The turnover ratio represents the percentage of a fund's holdings that change every year. Simply put, a turnover rate of 100 per cent implies that the fund manager has replaced his entire portfolio during the given period. Technically, the turnover ratio is the lower of the total sales or total purchases over the period divided by the average of the net assets. Higher the turnover ratio, greater the volume of trading carried out by the fund. If high turnover can generate high returns, then there should be no problems. The problem arises when a fund is trading heavily and not generating commensurate returns. Dynamic equity funds that move rapidly between sectors typically have a higher turnover ratio.
To read more, click: Turnover Ratio.
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