Portfolio Turnover Ratio Explained - Motilal Oswal Mutual Funds Guide
What Does Portfolio Turnover Ratio Mean?
The Portfolio Turnover Ratio (PTR) is a simple way to see how often a fund manager buys and sells investments in a year. Think of it as a measure of how “active” the fund is.
- If the ratio is high, it means the fund manager is trading a lot, changing the portfolio frequently.
- If the ratio is low, it means fewer trades and a more stable portfolio.
PTR helps you understand the style, cost, and tax impact of a fund. In this guide by Motilal Oswal, we’ll break it down step by step—with the formula, an easy example, and tips on how to use PTR while choosing mutual funds.
How to Find the Portfolio Turnover Ratio
The Portfolio Turnover Ratio (PTR) shows how actively a mutual fund is trading. To calculate it, you need two main numbers: the total value of securities bought, and the total value of securities sold during a given year. You then compare these values with the fund’s average assets under management (AUM) for the same year. Instead of using both purchases and sales, the formula takes the smaller (lesser) value of the two. This helps avoid double-counting and gives a fairer picture of trading activity. Finally, the ratio is expressed as a percentage.
Formula
Portfolio Turnover Ratio (PTR) = (Lesser of Securities Bought or Sold) ÷ (Average AUM) × 100
This formula is widely used by financial experts and is the standard method you will find in mutual fund factsheets. Most funds report PTR on a 12-month (annual) basis.
Step-by-Step Method to Compute PTR
- Add up total purchases – Calculate the value of all securities (like shares, bonds, etc.) the fund bought during the year.
- Add up total sales – Calculate the value of all securities sold during the same year.
- Find the smaller number – Compare purchases and sales; pick the lesser value.
- Calculate average AUM – Take the average of assets managed by the fund during that year.
- Apply the formula – Divide the smaller number (step 3) by the average AUM (step 4), then multiply by 100 to get the percentage.
Example of Portfolio Turnover
Suppose a mutual fund portfolio is worth ₹10,00,000 at the start of the year and grows to ₹12,00,000 by the end of the year.
Step 1: Find the average portfolio size
(₹10,00,000+₹12,00,000)÷2=₹11,00,000(₹10,00,000 + ₹12,00,000) ÷ 2 = ₹11,00,000(₹10,00,000+₹12,00,000)÷2=₹11,00,000
Step 2: Look at purchases and sales
- Total purchases = ₹1,00,000
- Total sales = ₹50,000
Step 3: Take the smaller value → ₹50,000
Step 4: Apply the formula
(₹50,000÷₹11,00,000)×100=∗∗4.54(₹50,000 ÷ ₹11,00,000) × 100 = **4.54%**(₹50,000÷₹11,00,000)×100=∗∗4.54
This means the Portfolio Turnover Ratio is 4.54%.
What this tells us
- Only around 5% of the portfolio changed in that year.
- This is a very low turnover, which shows the fund manager did very little buying and selling.
- Such funds usually follow a buy-and-hold approach, keeping the portfolio stable.
What a High Portfolio Turnover Ratio Means
A high Portfolio Turnover Ratio (PTR) means the fund manager is buying and selling investments very often. This shows that the fund is being managed in a very active way, with frequent changes in the portfolio to take advantage of short-term market movements. While this approach can sometimes lead to higher returns, it also brings certain drawbacks. Frequent trading usually increases the transaction costs within the fund, which may reduce overall returns for investors. In addition, in taxable accounts, a high PTR can result in more tax events since profits are realized more often. However, a high PTR is not always negative—it simply means the fund follows an aggressive style, and investors should carefully check if the higher costs are balanced by consistent performance.
What a low PTR usually signals
A low Portfolio Turnover Ratio (PTR) shows that the fund manager follows a more stable, buy-and-hold approach. Instead of making frequent trades, the manager holds investments for longer periods, which often aligns with index funds and passive strategies. This usually helps in keeping transaction costs low and can also provide tax benefits, making it attractive for long-term investors who prefer less risk and more consistency. However, a low PTR does not automatically mean higher returns—it only indicates that the fund is managed in a steady way without reacting too much to short-term market changes.
How Taxes Affect Portfolio Turnover Ratio
Taxes play an important role when looking at the Portfolio Turnover Ratio (PTR). A higher PTR means the fund is buying and selling more often. This can lead to more short-term capital gains, which are usually taxed at a higher rate in India. On the other hand, a lower PTR means fewer trades, which results in fewer taxable events and may help investors save on tax. In the Indian context, the rules changed from July 23, 2024. Now, long-term capital gains (LTCG) on listed equity and equity-oriented mutual funds are taxed at 12.5%, after an exemption of ₹1.25 lakh in a financial year. Short-term capital gains (STCG) are taxed at 20% for sales made on or after that date. Since rules before July 2024 were different, investors should always check the transaction date and consult a tax advisor for their personal case.
Using Portfolio Turnover Ratio to Choose Mutual Funds
When choosing mutual funds, the Portfolio Turnover Ratio (PTR) can give you a clue about how actively the fund manager trades. A high PTR means more buying and selling, which could increase short-term capital gains tax and costs, while a low PTR means the fund is managed with fewer trades, which usually keeps costs and taxes lower. To use PTR practically, always compare it with other funds in the same category (for example, large-cap funds with large-cap funds). Also, look at PTR together with the expense ratio, consistency of returns, and risk. Very high or very low PTR is not automatically good or bad—it depends on the strategy. Remember, PTR shows the fund’s style, not a guarantee of returns. So, always check the fund factsheet to see how PTR is defined and reported by the AMC before making your decision.
Managed Funds vs. Unmanaged Funds
Feature
Actively Managed Funds (Managed)
Index Funds / ETFs (Unmanaged)
Who manages the fund?
A team of professional fund managers actively decide which stocks/bonds to buy or sell.
No fund manager makes daily decisions – the fund simply follows a market index like Nifty 50 or Sensex.
Portfolio Turnover Ratio (PTR)
Generally high, because managers frequently buy and sell securities.
Generally low, as changes only happen when the index itself is updated or rebalanced.
Reason for turnover
Managers aim to beat the market by stock picking, sector rotation, or timing. This requires frequent trading.
Designed to “mirror” an index, so turnover happens rarely – only when the index changes.
Impact on cost
Higher turnover = more transaction costs + higher tax implications for investors. These costs are included in the expense ratio and indirectly reduce returns.
Lower turnover = fewer trades, lower costs, lower expense ratio, and generally more tax efficient.
Risk & returns
Can deliver higher or lower returns than the market, depending on manager skill and market conditions.
Usually delivers market-like returns, neither much higher nor lower, but stable and predictable.
Example (India)
Actively managed large-cap funds often have higher PTR as managers keep reshuffling.
Nifty 50 index funds in India show much lower PTR compared to active peers.
Example (Abroad)
Many global active equity funds report PTRs well above 50–100%.
Large U.S. index funds like S&P 500 ETFs often report single-digit PTR, meaning very little trading.
What Is Considered a Good Portfolio Turnover Ratio?
A “good” Portfolio Turnover Ratio (PTR) depends on the type of fund and its investment strategy. For passive funds like index funds and ETFs, a low PTR is usually seen as good because it keeps costs low and helps the fund track its benchmark more closely. In these cases, PTRs in the single digits or below 20% are common and considered healthy. For actively managed funds, a moderate PTR in the range of 20% to 40% is often seen as balanced—this shows that the manager is actively reviewing and adjusting the portfolio without over-trading. If the PTR goes too high, say above 70%, it could mean frequent buying and selling, which may add unnecessary costs and tax implications unless the strategy strongly justifies it. On the other hand, an extremely low PTR in an active fund may suggest that the manager is not making enough decisions to add value. So, what’s “good” really depends on the fund type and whether the turnover aligns with the fund’s stated goal and performance.
Conclusion
Portfolio Turnover Ratio (PTR) is an easy way to check how actively a mutual fund is managed. It tells you how often the fund manager buys and sells investments. A high PTR means more trading, which can lead to higher costs and taxes. A low PTR shows a patient style, usually seen in index funds.
But remember, PTR should not be the only thing you look at. Always compare it with other factors like returns, risk, and expenses. Also, for Indian investors, the new mutual fund tax rules from July 23, 2024 are important to keep in mind before investing or redeeming.
If you want lower costs and fewer tax worries, funds with low to moderate PTR—like many Motilal Oswal schemes—may be a good fit. If you are okay with more risk and prefer an active approach, then funds with higher PTR could suit your growth goals.