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Why are funds having high portfolio turnover

The past six months have seen the turnover ratio of equity funds go up. Here's a look at the numbers


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Buy and hold investing strategy has become famous. Fund managers buy stocks and holds them for a long time. The underlying thesis being that those stocks will attain significant value over a long period of time. That is also a reason why buy and hold is synonymous with long-term investing. So, mutual fund investors are often told that they need to think long term. But how are fund managers practising buy and hold? To check this, we studied the portfolio turnover of over 300 equity funds. Portfolio turnover is the percentage of a fund's holdings that have changed in a given year. Our study shows that quite a number of equity funds have huge portfolio turnover in excess of 200%, while there are also quite a handful who churn a lot less.

What it portfolio turnover and how to interpret
Does your fund changes its stock holdings frequently? Does it sell a lot to book profits or buy more on dips? Portfolio turnover reveals these things. It is a number that is disclosed at the end of the month in fund factsheets. Portfolio turnover is calculated by taking either the total amount of new securities purchased or the amount of securities sold, whichever is less over a particular period, divided by the total net asset value (NAV) of the fund. This is the method used globally.

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A turnover ratio of 100% or more does not necessarily suggest that all securities in the portfolio have been traded. In fact, it represents the percentage of the portfolio's holdings that have changed over the past year. A low turnover figure indicates a buy-and-hold strategy, while a high turnover would indicate considerable buying and selling of securities.

If the portfolio is churned many times during a year, the fund will incur higher transaction costs. Aggressively managed funds generally have higher portfolio turnover rates than conservative funds. When you use portfolio turnover, do not forget to compare it with peer category schemes.

Funds with highest and lowest portfolio turnover
We studied 307 equity schemes, including index funds and ETFs, that have disclosed portfolio turnover. You can check the same on our website by clicking here. All together, these funds manage equity assets of nearly Rs 6.5 lakh crore.

In you break down the equity funds according to portfolio turnover, there are 21 equity schemes with more than 200% turnover. Taurus Largecap Equity Fund, Taurus Discovery (Midcap) Fund, Taurus Tax Shield Fund and Taurus Starshare (Multi Cap) Fund have turnovers between 400% and 750%. Do remember high turnover could also happen because of large inflows and outflows. For instance, Taurus Largecap Equity Fund's assets over last one year have dropped from over Rs 100 crore (July 2017) to Rs 38 crore (July 2018).
There are as many as 44 funds, including IIFL Focused Equity Fund, DHFL Pramerica Midcap Opportunities Fund and Axis Bluechip Fund, with turnover between 100% and 199%.

There are 106 equity schemes with turnovers between 50% and 99%. Equity schemes with lower turnovers (20-30%) maybe practising buy and hold. Many equity schemes could have high turnover due to utilization of derivatives in terms of investments.

Overall, there are 96 funds with turnover between 20% and 49%, and just 40 schemes with turnover less than 20%. Three schemes, viz., Aditya Birla Sun Life MNC Fund, Aditya Birla Sun Life Tax Relief 96 and HDFC Retirement Savings Fund Equity Plan sport portfolio turnover of just 1% to 2%.

Certain sectoral schemes, thematic schemes, index funds and ETFs sport low portfolio turnover. This may be because such schemes don't require to modify the portfolio as much. Also, there are no large and sudden inflows or outflows all of sudden in them.

However, there are exceptions. For instance, take technology funds. Looking at SBI Technology Opportunities Fund's turnover of 112.11% may given an impression of the fund manager did quite a bit of trading or churning in the portfolio. However, when you look at its peers such as ICICI Prudential Technology Fund (422.29%), Aditya Birla Sun Life Digital India Fund (414.1%), Tata Digital India Fund (247.24%) and Franklin India Technology Fund (224.41%), you can understand that there have been much bigger portfolio changes. Do note that IT funds have received a lot of inflows over the past few months, and that may be one of the reasons behind high turnovers.

Certain equity fund categories like value-oriented funds are known for buy and hold strategy. This is because typically value funds buy stocks in the downturn or when they are out of favour, and patiently wait for an upturn. As many would expect, schemes like Quantum Long Term, Equity and Templeton India Value Fund are among the funds with the lowest portfolio turnovers.

 
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