What is turnover ratio and how important is it?

What is turnover ratio? Should it be considered while selecting a fund?
- Susheel

Transcript: The turnover ratio represents the percentage of a fund's holdings that change every year. A fund with a 31% turnover means that 31% of its stock holdings have been replaced in a year. A higher turnover would mean more expense for an investor as buying and selling stocks incur some costs. However, in equity, churning and shuffling of the portfolio is crucial. Because that results in superior returns and that's what investors pay for.

A lower turnover ratio with better returns is always a desirable combination. But sometimes high turnover can't be avoided. For instance, when investors in a fund buy and sell too frequently, the fund manager is also forced to change or replace the underlying holdings. But again, too much shuffling of funds might stand for poor foresightedness and poor decision-making skills of the fund manager.

This article was originally published on May 17, 2017.