What Is a Good Turnover Ratio?
The definition of what constitutes a good turnover ratio—or turnover rate—for a mutual fund depends entirely on the type of fund you are considering and your goals for the investment. For passive mutual fund investments, a turnover ratio near zero is appropriate. If you are investing in a more actively managed fund with the stated goal of generating an aggressive rate of return, the fund could have a higher turnover ratio.
Key Takeaways
- Turnover ratios can vary widely from fund to fund, but usually fall between 0-100%. Ratios can exceed 100% if there is considerable turnover.
- Index funds should see low turnover rates since they are passively managed for the most part.
- Active funds see much higher turnover, but they are rebalanced in order to mitigate risk and adjust their portfolios during market swings and client input.
Understanding Turnover Ratios
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. A turnover rate of 0% indicates the fund's holdings have not changed at all in the previous year.
A rate of 100% means the fund has a completely new portfolio than it did 12 months ago. Everything it owned before has been sold, though not necessarily at the same time, and new investments have been made to replace those assets. A fund with a rate of 100% has an average holding period of less than a year. Some very aggressive funds have turnover rates much higher than 100%.
Indexed Funds
If you are investing in an indexed mutual fund, the passive nature of the security naturally means its turnover ratio should be very low. Indexed funds, as the name implies, are built to track given indexes and require almost no hands-on management. Stocks are only added or removed from the fund when the underlying index posts a change. An indexed fund with a high turnover rate is not being properly managed. Anything over 20% to 30% should be viewed with skepticism.
Active Funds
If you are investing in a mutual fund with the goal of generating rapid returns, you are looking at a higher turnover rate. The type of management strategy these funds employ is based on finding undervalued stocks, selling high and making the most of opportunities, which means there can be a lot of buying and selling during any given year. Though active funds may not always have very high turnover rates, an active fund that boasts high returns with low turnover is rare.
Some portfolio managers and asset managers find exceptionally high turnover to usually be indicative of a process called "churning," where a manager shuffles around a client's portfolio often in order to drum up trading commissions. Although this may be obvious when an investment professional reviews a trader's or manager's portfolio it can be less obvious to someone without as much formal financial education. For this reason, make sure to compare turnover ratios and commissions paid to a certain fund against those of their competitors.
What Is a Turnover Ratio?
A turnover ratio is the percentage of stocks and other assets in a mutual fund that have been replaced in the course of one year. It varies by the type of mutual fund, its investment objective, and the portfolio manager's investing style.
How Do I Calculate the Turnover Ratio of a Mutual Fund?
The turnover ratio of a mutual fund is calculated by taking the lesser of purchases or sales, and dividing that number by the average monthly net assets.
How Do I Check the Turnover Ratio for My Mutual Fund?
The turnover ratio can be found in the issuing company's latest financial statement on the mutual fund.
The Bottom Line
The turnover ratio tells you what percentage of stocks and other assets in the mutual fund have been replaced in the course of one year. It is a useful metric for evaluating mutual funds and deciding which ones can be a good addition to your portfolio. If comparable mutual funds to the one you're looking at have higher or lower turnover ratios, you may want to look further into the fund's performance to find out what causes the high activity or the lack of it, or even find a better choice in different funds.
FAQs
For passive mutual fund investments, a turnover ratio near zero is appropriate. If you are investing in a more actively managed fund with the stated goal of generating an aggressive rate of return, the fund could have a higher turnover ratio.
What is a good turnover ratio for a mutual fund? ›
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.
What is a good turnover ratio? ›
A good inventory turnover ratio is between 5 and 10 for most industries, which indicates that you sell and restock your inventory every 1-2 months.
What is a good turnover rate? ›
According to Gallup, 10% turnover is healthy, but every industry and every organization is different.
Is a low turnover rate good for a mutual fund? ›
Lower turnover often means higher net returns. Funds with low turnover take less time to run, which means lower costs to run the mutual fund. These cost savings can be passed on to you.
Is high turnover good or bad in a mutual fund? ›
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.
Is 1.5 asset turnover good? ›
If asset turnover ratio > 1
For example, let's say the company belongs to a retail industry where its total assets are kept low. 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.
What is a bad turnover ratio? ›
While organizations should aim for a 10 percent employee turnover rate, the national average in 2021 was slightly more than 47 percent.
Is a 5% turnover rate good? ›
Studies have routinely demonstrated that top performers contribute an average of 10 times more than average performers. Some firms, like Microsoft, claim that contribution number to be much closer to 100. From my experience, top firms keep turnover among the top 25 percent of the employee population to below 5 percent.
Is a higher turnover ratio better? ›
Is It Better to Have a High or Low Asset Turnover? Generally, a higher ratio is favored because it implies that the company is efficient in generating sales or revenues from its asset base. A lower ratio indicates that a company is not using its assets efficiently and may have internal problems.
Measure the right metrics
For example, in the the 2021 Bureau of Labor Statistics report, the overall turnover rate is 57.3%, but that number drops to 25% when considering only voluntary turnover, 29% when considering involuntary turnover and just 3% when looking at only high-performers.
Which mutual fund has the highest turnover ratio? ›
Six funds from Quant Mutual Fund - Quant Focused Fund (424%), Quant Flexi Cap Fund (393%), Quant Large & Mid Cap Fund (382%), Quant Mid Cap Fund (329%), Quant Value Fund (317%), and Quant Active Fund (278%) had high PTR in March. WhiteOak Mid Cap Fund, a midcap fund, had a portfolio turnover ratio of 250% in March.
What does high turnover in mutual funds mean? ›
A higher portfolio turnover ratio means that the securities are being turned over often, but the return generated per unit of risk by the fund is still lower than the category average.
Do you want high or low portfolio turnover? ›
Generally speaking, a low turnover ratio is desirable over a high turnover ratio. The rationale is that there are transaction costs involved with making trades (buying and selling securities). In addition, funds with a higher portfolio turnover ratio are more likely to incur higher capital gains taxes.
What does a 200% turnover rate mean for a mutual fund? ›
Roughly speaking, a Turnover Ratio of 100% is consistent with the fund replacing its entire portfolio in the year, holding the average portfolio security for 1 year; 50% corresponds with a fund replacing half of its portfolio in the year, holding the average security for 2 years; and 200% is compatible with a fund ...
What is a high portfolio turnover ratio? ›
Interpreting the Portfolio Turnover Ratio
A ratio of 100% or greater indicates that all the securities in the fund were either sold or replaced with other holdings over a one-year period.
