What is the Portfolio Turnover Ratio?

The portfolio turnover ratio (PTR) measures how frequently assets within a mutual fund or investment portfolio are bought and sold over a given period. A higher PTR indicates more active trading, while a lower PTR signifies a more passive investment approach. The ratio is expressed as a percentage and helps investors understand the fund manager's investment style and the associated transaction costs. 

High vs. Low Portfolio Turnover Ratio in Mutual Funds 

Understanding the implications of high and low portfolio turnover ratios is crucial for evaluating mutual fund performance. 

A high PTR suggests frequent buying and selling of stocks within the fund. For instance, a 100% PTR indicates that all the stocks were traded during the period. On the other hand, a low PTR indicates that stocks are rarely traded and are held for longer periods. This approach is known as the 'buy and hold' strategy. 

Higher trading activity incurs higher transaction costs, which can reduce overall returns. Each trade involves fees and capital expenditure for research and analysis. On the other hand, less frequent trading means lower transaction costs, leading to potentially higher net returns for investors. 

In volatile markets, fund managers might prefer a low PTR to avoid the risks associated with frequent trading.  
 

Portfolio Turnover Ratio and Investment 

PTR can help you understand the investment style and strategy of the fund manager. You can compare the PTR of different funds in the same category to see which one suits your risk appetite and return expectations. 

For instance, if you seek long-term, low-risk, , you may prefer a low-turnover fund over a high-turnover fund. 

It helps in evaluating the efficiency and effectiveness of the fund manager. By comparing the PTR of a fund with its benchmark index, you can assess the fund manager's ability to outperform the market. 
 

The Formula for the Portfolio Turnover Ratio 

The portfolio turnover ratio is calculated by dividing the total number of new securities purchased or sold (whichever is less) by the average Net Asset Value over a specific period. The result is expressed as a percentage, providing a clear picture of the trading activity within the fund. 

Example for PTR: 

Suppose an equity fund purchased stocks worth ₹30 crores and sold stocks worth ₹40 crores. The average NAV of the fund is ₹100 crores. 

So, the PTR for the given equity fund is 30%. This means that 30% of the fund’s portfolio was traded during the period.