Portfolio Turnover Ratio Explained: What It Means and Why It Matters
- Ayesha Bee
- 13 minutes ago
- 4 min read
Introduction
Many investors focus on returns, ratings, or expense ratios, but very few pay attention to the Portfolio Turnover Ratio (PTR), a metric that quietly influences how much they actually earn. PTR indicates how frequently a fund buys and sells securities, and its importance is often underestimated.
In this blog, we will break down what PTR really means, explain why it matters, and discuss its impact on your overall returns.
Portfolio Turnover Ratio
Suppose a mutual fund holds 4 stocks at the start of the year:
Stock | Value (₹ crore) |
Reliance | 25 |
HDFC Bank | 25 |
Infosys | 25 |
ITC | 25 |
Total Portfolio | 100 crores |
During the year, the fund manager makes some changes:
Sells half of Infosys (₹12.5 crore)
Sells half of ITC (₹12.5 crore)
Uses these ₹25 Crore and another ₹5 crore to buy TCS (₹15 crore) and SBI (₹15 crore)
Total value of stocks sold = ₹25 crores (min)
Total value of stocks bought = 30 crores
Portfolio @ start of the year = 100 crores
Portfolio @ end of the year = (100-25+30) 105 crores
Avg net assets = 100 + 105 / 2 = 102.5 crores
PTR = (Minimum of securities bought or sold / Avg net assets) * 100
We take the smaller of what the fund bought or sold because that tells us how much of the portfolio was actually changed. (You can’t replace more than you bought, and you can’t replace more than you sold.)
We divide it by the average size of the fund during the year to understand what portion of the whole portfolio was churned. it gives a realistic base to measure turnover, instead of just using the start or end value.
Then we multiply by 100 to show it as a percentage.
PTR = 25/102.5 * 100 = 24.39%
A PTR of 24.39% means:
The fund manager replaced 24.39% of the stock holdings during the year.
The remaining 75.61% of the portfolio stayed unchanged.
How to Interpret High vs Low PTR
Different mutual funds have different levels of trading activity, which is reflected in their Portfolio Turnover Ratio. Understanding what a high or low PTR means can help you judge a fund’s behavior, cost structure, and investment philosophy.
Low PTR (Below 30–40%) - Stable & Long-Term Approach
A low turnover ratio indicates that the fund manager is not trading frequently and instead follows a buy-and-hold strategy.
What it indicates:
The fund believes in long-term compounding
Lower hidden costs (brokerage)
A portfolio is usually stable and predictable
Who it is suitable for:
Long-term investors
People who prefer low volatility
Index funds, large-cap funds, value funds
High PTR (Above 70–100%+) - Active & Aggressive Strategy
A high turnover ratio means the fund manager is frequently buying and selling stocks.
What it indicates:
The manager is taking short-term or tactical calls
Higher trading costs may reduce returns
May cause more volatility
Could signal an aggressive or momentum-based strategy
Who it is suitable for:
Investors who don’t mind higher risk
Those seeking short-term opportunities
Small-cap, sector, or quant-driven funds
One cannot simply say that a low PTR is always better than a high PTR or vice versa.
According to Mirae Asset Mutual Fund, the decision also depends on the Sharpe Ratio, which measures the return a fund generates per unit of risk taken. For example, a portfolio may have a turnover ratio of 110% and a Sharpe Ratio of 1.1, while the category average Sharpe is only 0.65. This indicates that the fund is delivering significantly better risk-adjusted returns than its peers, making the higher turnover and associated expenses far more justifiable.
They also highlight other factors to consider, such as the age of the fund, its average AUM, and the fund manager’s market-timing ability. For instance, funds with lower AUM give fund managers more flexibility to churn the portfolio. If this frequent churning leads to superior risk-adjusted returns, the fund may attract more inflows over time, which could naturally reduce the need for high turnover in the long run.
Before we conclude the blog, let us invite you for a 1:1 financial planning session.
Conclusion
Portfolio Turnover Ratio is one of the most overlooked yet powerful indicators of a mutual fund’s behavior. While many investors focus on returns or ratings, PTR reveals how actively a fund is managed, how much it costs to maintain that strategy, and whether the fund’s approach aligns with your risk profile. However, a high or low PTR is not inherently good or bad—it must be interpreted in context. Factors like the Sharpe Ratio, fund size, manager strategy, market conditions, and overall risk-adjusted performance all play a crucial role.
Ultimately, PTR should be used as a supporting metric, not the sole decision-maker. A thoughtful investor considers how efficiently a fund converts risk into returns, whether its trading activity is justified, and whether the strategy consistently delivers value over time. By understanding PTR alongside other core metrics, you can make smarter, more informed investment choices that align with your goals.
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