TIPPING POINT

What is turnover ratio?

Turnover ratio is the percentage of a mutual fund's holdings that have been replaced within a given year. A turnover ratio of 100 per cent indicates that the fund manager has changed his entire portfolio once in the year; 200 per cent indicates he has changed his entire portfolio twice in a year; while 50 per cent indicates he has changed it once in two years.

What does this mean for investors?

A higher turnover ratio means that the fund manager engages in more buying and selling. Sometimes a fund manager may be able to produce good returns with this approach. But there is a cost to all this buying and selling (trading cost). If the active trading approach does not work, the fund would have incurred a cost without any gains. As fund size grows, a higher turnover ratio also results in a higher impact cost. Prefer a fund manager who is able to produce good returns with a lower turnover ratio.