32 equity mutual funds had less than 10% portfolio turnover ratio. Should investors be concerned?

Around 32 equity mutual funds had a portfolio turnover ratio of less than 10% in July. A deep dive in the data showed that these 32 equity mutual funds were from sectoral/thematic (including international funds), flexi cap, multi cap, large & mid cap, and focused fund categories. Majority of them were from the sectoral/thematic category.

Two schemes from Tata Mutual Fund – Tata Housing Opportunities Fund and Tata Resources & Energy Fund – had a portfolio turnover ratio of 9.79% and 9.73% respectively in July. ICICI Prudential NASDAQ 100 Index Fund, an international fund, had a portfolio turnover of 9% in the said period.

HDFC Multi Cap Fund and HDFC Large and Mid Cap Fund had portfolio turnover of 7.44% and 6.82% respectively. Two funds from UTI Mutual Fund – UTI Flexi Cap Fund and UTI Innovation Fund – in July had a PTR of 6% each.

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Two international funds – Motilal Oswal S&P 500 Index Fund and Nippon India US Equity Opp Fund – maintained a portfolio turnover of 5% each in July. Baroda BNP Paribas Manufacturing Fund, a manufacturing theme based fund, had the portfolio turnover of 2% in July. Aditya Birla SL Global Emerging Opp Fund and Aditya Birla SL Global Excellence Equity FoF had the lowest portfolio turnover ratio of 0.20% and 0.06% respectively.

How should an investor interpret this low portfolio turnover ratio?

“The portfolio turnover ratio cannot be an absolute measure of interpreting the quality of the portfolio or the fund’s performance potential. It is just one of the measures to assess whether the fund is moving in the right direction. Instead, what investors should look at while assessing the portfolio is whether companies that have been in the portfolio for a long time but have not been performing are still part of the portfolio. Have the fund managers made changes in them or not? Even with a low portfolio turnover, some of these funds have done well in a one-month timeframe. So, there is nothing that should be very concerning based on this ratio on a standalone basis,” said Chirag Muni, Executive Director at Anand Rathi Wealth.

Among these 32 equity mutual funds, most schemes had more than 10% portfolio turnover ratio in May and June whereas others had less than 10% portfolio turnover. ETMutualFunds checked this trend for the last three months (May – July).

Now the question is should investors be concerned about such a low portfolio turnover ratio?

“Fund managers usually maintain a low turnover ratio when they are very confident about the stocks in their portfolio. They typically take a timeline of two to three months, or longer, depending on when their targets are close to being met. Therefore, this ratio cannot be the only parameter to assess a fund,” said Chirag.

He also recommends that, “Investors should not be worried about a low portfolio turnover ratio, as making too many changes in the portfolio may also lead to undesirable results.”

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In July, out of 32 schemes, 24 schemes offered positive returns and eight schemes gave negative returns. HSBC Global Emerging Markets Fund lost the most of around 2.57%. Franklin India Feeder – Franklin U.S. Opportunities Fund lost 2.23%. ICICI Prudential NASDAQ 100 Index Fund lost around 1.94% in July.

Kotak Technology Fund offered the highest return of around 9.11% in July, followed by Baroda BNP Paribas Aqua FoF which gave 8.86%. Old Bridge Focused Equity Fund which gave 6.69%.

Two other funds – SBI Small Cap Fund and ICICI Prudential US Bluechip Equity Fund – which had a portfolio turnover of 94% and 65% respectively gave 3.90% and 6.64% returns respectively in July.

Does the low portfolio turnover impact the performance or returns delivered by mutual funds?

“There are funds with a portfolio turnover ratio greater than 50% delivering 10% returns in a one-month timeframe, and there are funds with a turnover ratio of 6% or 12% delivering returns of 9% to 10% over the same period. Therefore, this should not be an absolute parameter for measuring the success or failure of a fund,” said Chirag.

We considered equity and equity oriented for the study. We considered regular and growth schemes.

A higher portfolio turnover ratio (PTR) indicates continuous buying and selling of stocks by the fund managers which increases the costs and drags down the return of the scheme. On the other hand, low PTR means a buy-and-hold approach.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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