Should you opt for a fund with a low or a high turnover ratio?

The turnover ratio is a measure of the amount of churn in a fund's portfolio. If the fund manager churns or changes the portfolio once during the year, it will have a 100 per cent churn. If he churns only half the portfolio, it will have a turnover ratio of 50 per cent. And if he churns it twice in a year, it will have a turnover ratio of 200 per cent. 

In the matter of turnover ratio, the best thing to do is to stick to the mean. A very low churn can at times (though not always) be indicative of a portfolio that doesn't receive adequate attention. A fund with a very high churn is also not desirable. It indicates that the fund manager does not follow a 'buy-and-hold' strategy.

If all the buying and selling does not result in higher returns, then it can push the returns even lower. In the case of diversified equity funds in India, the median is 77 per cent. Stick to a fund that does not go too much above this level.  

     




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