Mutual funds can help diversify your investment portfolio. When comparing mutual funds, there are several key metrics to pay attention to, including the expense ratio and the turnover ratio. A mutual fund turnover ratio refers to how often the underlying assets in a specific fund are bought and sold. Turnover rates can vary greatly between different types of mutual funds and exchange-traded funds. We’ve answered what is a good mutual fund turnover ratio below or how this number is calculated. For further guidance on how best to integrate mutual funds into your investing strategy, consult with a trusted financial advisor.
Mutual Fund Turnover Ratio Explained
Mutual funds and exchange-traded funds (ETFs) are baskets of investments. They can include individual stocks, bonds, short-term cash instruments or other securities. A fund manager chooses what the mutual fund or ETF will hold and purchases those securities. Rather than buying individual stakes in all of these investments, a mutual fund allows you to own a little bit of everything in one convenient package.
But that doesn’t mean the underlying investments a fund owns remain the same. The fund’s manager can decide when to sell off underlying investments and add new ones to the fund. The rate at which this buying and selling occur is known as the mutual fund turnover ratio.
This is represented by a percentage and the higher the percentage, the more frequently a fund’s assets turn over. As a general rule of thumb, it’s more common to see higher turnover rates with actively managed mutual funds or hedge funds. Passively managed funds, including index funds and ETFs, tend to have a lower turnover rate.
The mutual fund turnover ratio is expressed as the rate of change over the course of a year. So, for example, if a fund has a turnover ratio of 50%, that means half of its investments were sold in the previous 12 months.
How Mutual Fund Turnover Is Calculated
Like other investing ratios, a mutual fund’s turnover rate can be calculated using a specific formula where you’ll need a couple very specific pieces of information. To calculate the turnover ratio for a fund you need to know:
- Purchased Securities:The total number of securities purchased by a fund for the 12-month period you’re calculating the ratio for
- Proceeds From Sale of Assets:The total proceeds realized from the sale of assets during that same 12-month period
It’s important to note that the Securities and Exchange Commission requires funds to calculate the turnover ratio using the smaller of those two numbers. So if you’re estimating the turnover ratio yourself, choose the smaller figure for your calculations to ensure accuracy.
Next, divide the number you’ve chosen by the fund’s assets, based on the average value for the 12-month period. You would then multiply the resulting figure by 100 to get the turnover ratio percentage.
So say you have a fund that bought and sold $10 million in assets over the previous year. The fund’s average assets were $40 million. If you divide $10 million by $40 million, you’d get 0.25, which means a 25% turnover ratio.
Why Turnover Ratio Matters for Mutual Funds
The turnoverratio is important when evaluating mutual funds or ETFs because it can tell you a lot about how the fund and the fund manager operate. It can also be helpful for managing investment costs.
Funds that have higher turnover ratios, for example, can trigger higher costs for investors. First, a fund that’s actively managed may charge a higher expense ratio to cover the fund manager’s services. The expense ratio represents the percentage you pay to own the fund on an annualized basis. At the low end, you can find index funds with expense ratios around 0.50% to 0.10%. But the most expensive funds can easily have expense ratios over 1%.
The turnover ratio can also give you an idea of what the fund’s investment strategy is, which is important for choosing funds that align with your goals and objectives. A growth mutual fund, for instance, may have a higher turnover ratio if the fund manager is constantly looking for the best growth stocks to drive returns. But a fund that uses a value investing approach may have a lower turnover ratio if the fund manager is buying assets that have the potential to appreciate over time.
That’s important to know if you’re a buy-and-hold investor. With buy-and-hold investing, you’re buying securities and holding on to them to realize capital appreciation, income from dividends or both. If you want funds that reflect that same approach, then choosing ones with a lower turnover ratio could be a good fit.
What Is a Good Mutual Fund Turnover Ratio?
There’s no specific ideal turnover ratio for a mutual fund or ETF. And a higher or lower turnover ratio isn’t necessarily a reliable indicator of how a fund has performed or will perform over time. Generally, passively managed ETFs and index mutual funds should have a lower turnover ratio. If a passively managed fund is turning over at a rate of more than 20% to 30%, that could suggest that the fund is being mismanaged.
With actively managed funds, there’s no such thing as a too-high ratio. It’s not uncommon to see a turnover of 50% of a fund’s assets or more in a given year with funds that take a more aggressive approach. What’s important to keep in mind is what the fund manager is doing to manage risk. Periodic rebalancing, for example, can help with minimizing risk while boosting returns, regardless of how often assets are turning over.
When comparing mutual funds, it’s important to look at the turnover ratio, the expense ratio, the fund manager’s overall track record and the fund’s underlying holdings. Checking the holdings can help you avoid becoming overweight in any one area. This can be particularly important if you’re using index funds to invest.
Say you have two funds, one that tracks the S&P 500 as its benchmark and another that tracks the Dow Jones U.S. Large-Cap Total Stock Market Index. Both of those indexes include large-cap companies, meaning those with a market capitalization of $10 billion or more. Holding both funds in your portfolio could cause you to be overexposed to large-cap holdings if you don’t have other funds to balance things out.
The Bottom Line
The mutualfund turnover ratio is a useful metric for evaluating mutual funds and deciding which ones belong in your portfolio. If you don’t want to calculate the turnover ratio yourself, you can easily find it by checking a fund’s prospectus. If you prefer to check fund and stock quotes online, you can also find turnover ratios listed along with other key fund characteristics on websites that track real-time market prices.
Tips for Investing
- Consider talking to your financial advisor about mutual fund turnover ratios when deciding how to invest. If you don’t have a financial advisor finding one doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- When comparing mutual funds and exchange-traded funds, it’s important to understand how they differ. While mutual fund trades close at the end of the market day, ETFs trade on an exchange just like a stock. ETFs can be actively or passively managed and passively managed funds often carry lower expense ratios and turnover rates.
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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
FAQs
A turnover ratio is a simple number used to reflect the amount of a mutual fund's portfolio that has changed within a given year. This figure is typically between 0% and 100%, but can be even higher for actively managed funds.
Why is turnover ratio important for mutual fund? ›
The turnover ratio shows the percentage of a mutual fund's holdings that have been replaced during the previous year. Lower turnover ratios often mean lower costs and higher returns. Higher turnover ratios often mean the fund is more actively managed, which leads to higher costs and taxes.
Is a high turnover rate good for mutual funds? ›
Higher turnover rates mean increased fund expenses, which can reduce the fund's overall performance. Higher turnover rates can also have negative tax consequences. Funds with higher turnover rates are more likely to incur capital gains taxes, which are then distributed to investors.
What is a good portfolio turnover ratio? ›
Index funds should not have a turnover rate higher than 20% to 30% since securities should only be added or removed from the fund when the underlying index makes a change in its holdings; a rate higher than 30% suggests the fund is poorly managed.
What is 15x15x15 rule in mutual fund? ›
One such infamous rule is 15x15x15, according to which an investor can become a crorepati in just 15 years. According to this rule, an investor has to invest Rs. 15,000 per month in a mutual fund for 15 years that is expected to generate returns at the rate of 15 per cent.
How do you calculate fund turnover ratio? ›
The turnover ratio measures fund yearly trading activity. It is calculated by taking the lesser of purchases or sales, dividing that number by average monthly net assets.
What is turnover and why is it important? ›
Employee turnover is one of the most important metrics to track in any workplace. It tells you how satisfied your employees are, and if they are likely to leave. Voluntary turnover refers to employees deciding to leave, whereas involuntary turnover is when a boss decides to remove an employee from the team.
What are turnover ratio and its importance? ›
What Is Turnover Ratio? The turnover ratio or turnover rate is the percentage of a mutual fund or other portfolio's holdings that have been replaced in a given year (calendar year or whichever 12-month period represents the fund's fiscal year).
Why is higher turnover better? ›
A higher turnover rate can reflect higher profitability, while a low turnover rate can reflect lower profitability. A turnover rate that equals 1 or less reflects the company has more inventory than current consumer market demands. A turnover rate that's over 1 shows a company sells products that match market demands.
What is a good average rate of return on a mutual fund over 10 years? ›
For stock mutual funds, a “good” long-term return (annualized, for 10 years or more) is 8% to 10%. For bond mutual funds, a good long-term return would be 4% to 5%.
Equity Funds with Best Returns in a 10 Years
| Equity Funds | 10-year Return |
|---|
| HDFC Equity Fund | 14.76% |
| Reliance Multi Cap Fund | 17.33% |
| Franklin India Prima Fund | 18.25% |
| ICICI Prudential Midcap Fund | 15.91% |
4 more rowsThe best-performing large-company stock mutual funds have produced returns of up to 17% in the last 10 years. It should be noted that average annualized returns have been higher than usual — at 14.70% during this time frame — driven by a multi-year bull market.
Is 1.5 asset turnover good? ›
As a result, most companies' average ratio is always over 2. In that case, if this company has an asset turnover of 1.5, then this company isn't doing well. And the owner has to think about restructuring.
What is average portfolio turnover? ›
You can calculate the portfolio turnover ratio quite simply. It is the higher of: Buys and Sells in One Year. Divided by the average of. Portfolio Starting and Ending Balance.
Is 2 a good turnover ratio? ›
In most cases, a good turnover ratio in retail is between 2 and 4. However, keep in mind that it depends on what you sell, how you sell and to whom you sell. And don't forget that a good inventory turnover ratio has a few dependents, and generally, the higher the ratio, the better the business is managed.
What is the 80/20 Rule investing? ›
The 80/20 rule can be effectively used to guard against risk when individuals put 80% of their money into safer investments, like savings bonds and CDs, and the remaining 20% into riskier growth stocks.
What is the investment rule of 7? ›
Let's say you have an investment balance of $100,000, and you want to know how long it will take to get it to $200,000 without adding any more funds. With an estimated annual return of 7%, you'd divide 72 by 7 to see that your investment will double every 10.29 years.
What is the 30 day rule on mutual funds? ›
In some situations, an investor might be able to sell fund shares at a loss to avoid a distribution. However, if the investor then repurchases shares in the same fund within 30 days, the “wash sale rule” prevents them from claiming a capital loss for that tax year.
Is it better to have a high or low turnover ratio? ›
What Is the Best Inventory Turnover Ratio? In general, the higher the ratio number the better as it most often indicates strong sales. A lower ratio can point to weak sales and/or decreasing market demand for the goods.
What does 100 percent turnover mean? ›
Employee Turnover Rate Formula
It is possible for your turnover rate to be more than 100%. This means that you replaced your entire workforce during that time period. As a general rule of thumb, a turnover rate higher than 20% is a sign that something is probably wrong with your work environment.
A turnover ratio of 100% means the ETF or mutual fund has bought and sold all its positions within the last year. A relatively low turnover ratio—20% or 30%—indicates a buy & hold strategy. A high turnover ratio—100%+ -would indicate an investment strategy involving more trading than holding.
What are the 3 types of turnover? ›
You can calculate involuntary turnover, voluntary turnover and total turnover. Example: Say you start off the year with 100 employees.
What is a turnover in simple terms? ›
Turnover is the total sales made by a business in a certain period. It's sometimes referred to as 'gross revenue' or 'income'. This is different to profit, which is a measure of earnings. It's an important measure of your business's performance.
What is the actual meaning of turnover? ›
Turnover is a concept in accounting that shows how quickly a company runs its business. The most common ways to measure a company's turnover are the accounts receivable and inventory ratios. In investing, turnover is how much of a portfolio is sold in a given month or year.
Is 20% a high turnover rate? ›
Organizations should aim for 10% for an employee turnover rate, but most fall into the range of 12% to 20%. Certain industries report higher employee turnover rates due to the nature of the job.
What is the best predictor of turnover? ›
Absenteeism is the strongest indicator for turnover intentions, together with tenure. Performance: another important factor is performance. People with a low performance are likely to leave as people with a high performance are less likely to leave.
Why low turnover is good? ›
When your turnover is low, you save money by avoiding unnecessary mistakes. Lower turnover can also have a beneficial effect on the payroll even if you pay your long-term employees well because you don't have to train new workers and you avoid losing efficiency while they get up to speed.
What is a reasonable rate of return on retirement investments 2022? ›
Many retirement planners suggest the typical 401(k) portfolio generates an average annual return of 5% to 8% based on market conditions. But your 401(k) return depends on different factors like your contributions, investment selection and fees.
How long should you hold a mutual fund? ›
If you are actually looking at equity funds to help you achieve your long term goals then you at least need to give yourself a holding period of 8-10 years.
Why are mutual funds 1 year returns so high? ›
Why 1-year returns for some funds are higher than its 3 or 5-year returns? Mutual funds return on an investment is reported on an annualized basis. And mutual fund returns fluctuate across years. This is the reason why 1-year returns may appear higher than 3 years returns.
Here is the list of top 10 schemes:
- Parag Parikh Flexi Cap Fund.
- UTI Flexi Cap Fund.
- Axis Midcap Fund.
- Kotak Emerging Equity Fund.
- Axis Small Cap Fund.
- SBI Small Cap Fund.
- SBI Equity Hybrid Fund.
- Mirae Asset Hybrid Equity Fund.
Over the past 30 years, the S&P 500 index has delivered a compound average annual growth rate of 10.7% per year.
Which is the most profitable mutual fund? ›
Invest in Top AMCs
- Axis Mutual Fund.
- HDFC Mutual Fund.
- Nippon India Mutual Fund.
- ICICI Prudential Mutual Fund.
- IDFC Mutual Fund.
- Motilal Oswal Mutual Fund.
- ABSL Mutual Fund.
- Mirae Asset Mutual Fund.
Since its inception, it has generated returns of 19.25% on average annually, and every three years the invested capital has doubled. Considering that the fund has produced an average annual return of 19.25% since its inception, a monthly SIP of ₹10,000 initiated 20 years ago would today be equal to almost ₹1.82 Cr.
What is a good 5 year return on investment? ›
Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market.
What is a good average rate of return on investments? ›
What Is a Good ROI? According to conventional wisdom, an annual ROI of approximately 7% or greater is considered a good ROI for an investment in stocks. This is also about the average annual return of the S&P 500, accounting for inflation.
Is 0.5 A good asset turnover ratio? ›
In the retail sector, an asset turnover ratio of 2.5 or more could be considered good, while a company in the utilities sector is more likely to aim for an asset turnover ratio that's between 0.25 and 0.5.
What does an asset turnover ratio of 0.5 mean? ›
The asset turnover ratio determines net sales of the company as a percentage of its assets to establish the amount of revenue realized from each dollar of its assets. For example, a 0.5 ratio indicates that every dollar of assets makes 50 cents of the sales.
What is a strong asset turnover? ›
A high asset turnover ratio indicates a company that is exceptionally effective at extracting a high level of revenue from a relatively low number of assets. As with other business metrics, the asset turnover ratio is most effective when used to compare different companies in the same industry.
What is 20 25 rule? ›
In the case of non-fulfillment with either of the above two conditions i.e. minimum of 20 investors and no single investor should account for more than 25% of the corpus of the scheme/plan, a three months time period or the end of succeeding calendar quarter, whichever is earlier, from the close of the Initial Public ...
In a 60/40 portfolio, you invest 60% of your assets in equities and the other 40% in bonds. The purpose of the 60/40 split is to minimize risk while producing returns, even during periods of market volatility. The potential downside is that it likely won't produce as high of returns as an all-equity portfolio.
What is a decent portfolio return? ›
A good place to start is looking at the past decade of returns on some of the most common investments: Average annual return on stocks: 13.8 percent. Average annual return on international stocks: 5.8 percent. Average annual return on bonds: 1.6 percent. Average annual return on gold: 0.8 percent.
What level of turnover is acceptable? ›
When asked, most respondents considered the ideal amount of turnover would be 1% to 10%. So turnover in businesses, on average, is double what we think is ideal. Personally, I have found that if your business has less than 10% turnover, it can lead to other challenges.
Is 25% a high turnover rate? ›
As a general rule, employee retention rates of 90 percent or higher are considered good and a company should aim for a turnover rate of 10% or less.
What turnover is considered high? ›
Typically, high turnover means 28% of your new employees quit within the first 90 days of their employment. (Again: this presents an enormous cost to companies because they have to constantly repeat a cycle of recruitment, hiring, and training new people.)
Why is asset turnover ratio important for investors? ›
Key Takeaways. Asset turnover is the ratio of total sales or revenue to average assets. This metric helps investors understand how effectively companies are using their assets to generate sales. Investors use the asset turnover ratio to compare similar companies in the same sector or group.
Which ratios are important for mutual funds? ›
The PE ratio of mutual fund is price by earnings ratio. It simply tells you how much you are paying to earn Rs 1. If the PE ratio is 25, you are paying Rs 25 to earn Rs 1, a 4% return.
How do you know if asset turnover ratio is good? ›
All told, for the asset turnover ratio, the higher, the better. A higher number indicates that you're using your assets efficiently. For instance, an asset turnover ratio of 1.4 means you're generating $1.40 of sales for every dollar of assets your business has.
Is it better to have a high or low asset turnover ratio? ›
Interpretation of the Asset Turnover Ratio
The ratio measures the efficiency of how well a company uses assets to produce sales. A higher ratio is favorable, as it indicates a more efficient use of assets. Conversely, a lower ratio indicates the company is not using its assets as efficiently.
What is asset turnover ratio in simple words? ›
Definition: Asset turnover ratio is the ratio between the value of a company's sales or revenues and the value of its assets. It is an indicator of the efficiency with which a company is deploying its assets to produce the revenue.
Mutual funds can help diversify your investment portfolio. When comparing mutual funds, there are several key metrics to pay attention to, including the expense ratio and the turnover ratio. A mutual fund turnover ratio refers to how often the underlying assets in a specific fund are bought and sold. Turnover rates can vary greatly between different types of mutual funds and exchange-traded funds. We’ve answered what is a good mutual fund turnover ratio below or how this number is calculated. For further guidance on how best to integrate mutual funds into your investing strategy, consult with a trusted financial advisor.
The turnoverratio is important when evaluating mutual funds or ETFs because it can tell you a lot about how the fund and the fund manager operate. It can also be helpful for managing investment costs.
The mutualfund turnover ratio is a useful metric for evaluating mutual funds and deciding which ones belong in your portfolio. If you don’t want to calculate the turnover ratio yourself, you can easily find it by checking a fund’s prospectus. If you prefer to check fund and stock quotes online, you can also find turnover ratios listed along with other key fund characteristics on websites that track real-time market prices.