Turnover Ratio in Mutual Funds

Turnover ratio when used in the context of mutual funds refers to turnover done by the manager in relation to the total portfolio of the mutual funds. It can be better explained with the help of an example; suppose the manager who is managing the equity mutual fund and he or she does trading that is buying and selling of stocks worth 25 million in a particular year where the total value of portfolio is 50 million than the turnover ratio would be 50 percent. Higher ratio is not good because it leads lowering of profits for the investors.

As one can see this ratio would be higher for mutual funds which do aggressive trading in equity markets in comparison to those mutual funds which are conservative and follow buy and hold strategy. A very high turnover ratio needs to be justified because it leads to more expenses as one has to pay brokerage and commission every time a transaction is done in markets and therefore less profits for the mutual fund and hence if after paying for all those expenses one can earn more profits then conservatively managed mutual funds than only aggressive trading is justified.


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