fund managers often advise investors on television to take a long-term view. Do they practice what they are preaching?
Turnover Ratio (PTR) is one such statistic that will let you find it out. It highlights the extent to which the is churned by a scheme in a year.
PTR is calculated as a percentage of sale or purchases of securities (whichever is lesser) made by ascheme during a particular period (usually a year) divided by its average assets. For instance, if Rs 300 crore worth of stocks were purchased/sold in a year, while average assets were Rs 500 crore, PTR for that scheme is 60 percent (300/500 multiplied by 100). It indicates that, on an average, 60 percent of the was churned during the year.
What does it mean?
A 100 percentturnover, however, doesn’t necessarily mean that the whole was replaced in a year. Usually, fund managers have a long-term orientation on the core , while trading frequently on the rest to capitalise on emerging opportunities. So, a 100 percent PTR can also mean that a part of the was churned many times over.
PTR can be higher for many reasons.
Volatile equity markets throws up opportunities resulting in fund managers changing their . Similarly, changing macroeconomic conditions and government initiatives can make certain sectors more lucrative than others. Fund managers tweak the to make the most of it.
Moreover, PTR can change based on the type of. Growth-oriented funds, in general, have higher PTR than value and . trade only when there is a change in the composition of the index and value funds by dint of their philosophy tend to hold on to undervalued stocks till it reaches its targeted value. Growth funds, in contrast, are on the constant look out for stocks and sectors that will be out-performers, resulting in a lot of buying and selling being made. Similarly, funds could have high PTR due to its dynamic fund management.
As per latest data, large & mid cap (58%) and multi cap (47%) category had the highest PTR (median) among , while small cap had among the lowest (21%).
Moreover, the investment philosophy of the fund house influences the PTR statistics. For instance, players have a high PTR for its(major categories) as compared to others, as per latest available data. Perhaps their fund managers want to capitalise on short-term market opportunities by way of trading. Some invest in derivatives to capitalise on mis-pricing opportunities between cash and futures market. Then there were others who were found to have very low turnover ratios for their .
Churning and Returns
Just because a fund is churning a returns are going to be better. A needs to resort to prudent stock picking to stay ahead of the curve.more frequently doesn’t mean its
Having said that, it has also been seen that stablehave often resulted in market out-performance than otherwise. A consistently high turnover only indicates the is chasing momentum stocks which are a riskier bet.
Moreover, PTR is not a litmus test to figure out if your fund is doing well or not. At best it is a complementary decision-making tool which you should use in addition to checking its consistency of performance, its risk-adjusted return measure, expense ratios and other factors.
No litmus test
One should not read too much into a single PTR statistic. Rather investors should look at long-term trends.
Moreover, PTR is not a litmus test to figure out if your fund is doing well or not. At best it is a complementary decision-making tool which you should use in addition to checking its consistency of performance, its risk-adjusted return measure,and other factors.
Fund managers or day traders in disguise? PTR will let you find that out. Use PTR as an additional tool to shortlist.