Personal Finance

How often do funds churn their holdings?

Eswarkrishnan Chellam | Updated on January 20, 2018 Published on May 15, 2016

A look at the portfolio turnover ratio tells you more

Any fund manager’s objective is to skilfully manage a portfolio of stocks and bonds that involves buying and selling.

The churn or how frequently securities are traded is referred to as the portfolio turnover ratio (PTR). Primarily disclosed by equity and balanced funds, it is computed as the ratio of the lower value of purchase and sales, to the average net assets in the past one year, excluding cash and near-term debt.

For schemes that are less than a year old, average assets since inception are considered.

Expressed as a percentage or number of times, the portfolio turnover ratio gives investors an insight into the funds’ buying and selling activity.

Although reported by most fund houses in their factsheets, SEBI, in its recent circular, mandated reporting PTR.

Does the value matter?

Yes, it does, but not in isolation. Other metrics must be considered as well. Having a higher or lower number is not such a bad thing. It depends on the fund manager’s assessment of market conditions and the fund’s genre.

Passive funds such as exchange-traded funds (ETF) report very low PTRs, while active funds may report higher numbers even when sharing a common benchmark. For instance, ICICI Prudential Nifty ETF for February 2016 reported a PTR of 0.14 times, while its actively managed cousins — ICICI Prudential Focused Bluechip Equity Fund and ICICI Prudential Top 100 Fund — reported higher values of 1 and 1.35 times respectively.

Large-cap diversified equity funds generally report lower PTR than mid- and small-cap funds. Arbitrage funds, by their very nature, report high PTR. For instance, in February, ICICI Prudential Equity — Arbitrage Fund’s PTR was 11.2 times.

Does a PTR of 100 per cent mean that the portfolio is completely revamped every year? Not necessarily; it indicates extensive trading activity.

Frequent trading can boost turnover ratios even as other positions are retained. A lower number may indicate a buy and hold strategy. The inverse of turnover ratio provides average holding period.

Published on May 15, 2016

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