Turnover Ratio

How should your equity fund manager run your portfolio? Should he buy stocks and hold on to them? Or should he trade frequently depending on the opportunities that the stock markets throw up? Is active management the road to riches or is a passive approach the way to wealth? Or does it matter? Well, each buy and sell transaction in the stock markets involves a brokerage cost. This brokerage cost has to be borne by the mutual fund, which in turn passes it on to its investors. So investors have to pay for the trading carried out by the fund on their behalf. Obviously, higher the volume of trading, greater will be the associated costs. And greater trading costs can definitely eat into returns. So how does one know how much the fund manager is trading

This article was originally published on July 30, 2003.