What is the Turnover Ratio of a Mutual Fund, and how does it impact your returns?

What is the fuss?

One often finds online advise on using the right parameter to pick mutual funds. One such metric thrown around is the turnover ratio of the mutual fund. I find many online advise on avoiding a mutual fund because it has high turnover ratio. This, is not entirely correct. In this post, I will cover what exactly is turnover ratio, and how to use it to evaluate mutual funds. Lets get started.

What is Turnover Ratio?

Turnover basically means the rate at which you are replacing things. In the context of a Mutual Fund, it means the rate at which the stocks in the Mutual Fund’s portfolio are being replaced.

Example: A mutual fund has 100 stocks in its portfolio. If 50 of these stocks are replaced with new stocks in the next 1 year, the turnover ratio is 50/100, or 50%.

There is no formal definition of high or low turnover ratio. However, anything more than 30% is considered high turnover ratio. Less than 30% is considered ok. Less than 10% signals low turnover ratio.

Is High Turnover really bad?

Lets take a noob view of turnover ratio. Lets say, a mutual fund has turnover ratio of 100%. It means that…