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Does high turnover ratio mean higher returns?

August 14, 2009 09:00 IST

A calculator and moneyWhen you are investing in a mutual fund, it is important for you to remember that the fund manager follows his own style of handling your portfolio.

In certain cases, the fund manager tends to buy stocks and hold onto them for a long time and only sells them if certain situations so demand.

But in other cases, the fund manager keeps on buying and selling the stocks that his fund holds. The question that arises: why does the fund manager do so and how does it impact the fund's returns?

In order to answer these questions, you need to understand turnover ratio. This is important as each time the fund buys and sells the stocks, he incurs brokerage expenses. In turn, these expenses are passed on to the mutual fund and ultimately to the investors. So while investing, it is important for you to keep a watch on this ratio.

As an investor, you should be concerned about the way in which the fund manager manages your fund.

If he buys and sells the stocks in the fund regularly, you end up paying more and thus reducing your returns. While this strategy can give you high returns, it is more likely that the fund manager may make wrong choice.

So always watch out for the turnover ratio when choosing the fund. Certain funds have higher turnover ratio than others. Find out if the turnover has managed to give significant returns. Otherwise it is time you dump the fund.

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