However, transactional brokerage fee charges are not included in operating expense ratio. Then again, low turnover ratio funds that show minimal gains are also bad options as the fund may be in dire need of a restructuring in its holdings. Investopedia notes: 'Unless the superior asset selection renders benefits that offset the added transaction costs they cause, a less active trading posture may generate higher fund returns'. So very high trading activity, or high turnover ratio, may be bad if the high expense ratio dampens the total return. Thus, the good and bad aspect also involves the related costs that the fund will have to bear.Įvery transaction will come at a cost, which eventually is passed on to the investors. Buying or selling securities carry various expenses, including the taxes made on capital gains. It also helps the cost-conscious fund investors, as every transaction would carry charges. Turnover above 100% on the other hand reflect high buying and selling activity. Morningstar notes that turnover figure between 20% and 30% reflects a buy-and-hold strategy. Nonetheless, it serves the purpose of understanding the trading strategy, which is crucial for investors. Similarly, low turnover ratio is not a litmus test for guessing a fund's performance. High turnover ratio does not necessarily mean more profits or it does not assure high returns going forward. Most importantly, high or low turnover ratio is never an indicator of the fund's performance. Again, trading half of the holdings ten times in a year would also give us a turnover ratio of 500%. A turnover ratio of 500% implies the fund manager has replaced all holdings in a portfolio five times in a year. The turnover ratio is therefore simply the ratio of the rate of turnover. Usually, the turnover is calculated for a 12-month period. It is generally calculated after considering the total amount of securities sold or bought (whichever is lower) over a fixed period and then divided by total net asset value. This is because the portfolio turnover is the measure of how often a fund buys and sells assets. Obviously then, a buy-and-hold strategy investor would look for funds that offer a lower turnover. Investors looking for active trading would prefer funds with high portfolio turnover or turnover ratio. However, mutual fund investors need not lose heart, as a look at the portfolio turnover would indicate part of the strategy the fund manager is following for the respective fund. While this is simple for stock investors to decide on the strategy as they can trade themselves, mutual fund investors need to rely on the fund managers. Investors may opt for a buy and hold strategy, or may be active in trading based on the opportunities the markets provide.

Funds turnover ratio