Turnover as a Performance Indicator

While buying mutual funds, most of the investors consider turnover as one of the performance measuring indicator along with other indicators such as P/E ratio, load/no-load, investment strategy, etc. As per this blog, considering mutual fund turnover as a performance indicator is ridiculous. At most, you can consider the turnover factor as the complimentary performance indicator along with other regular performance indicators.

In a financial year, if a mutual fund shows 100% turnover means that it has replaced all of its holdings at least once in the last 12-month period. If the turnover is more than 100% means, the rate of replacement of holdings increased by more than 1 factor. There are so many things to be taken into consideration before judging why a particular fund is showing that much percentage turnover. And one more factor is that whenever a fund goes for buying/selling of holdings, it has to pay tax on every transaction. Whatever profit it is expecting to earn by buying/selling the holdings that should be more than what it pays as tax and other expenses.

A few funds do not go for huge turnovers. But that does not mean that they are so prudent and are following a profitable path. As per funds history, there are so many low turnover funds that have made huge losses by not doing trades at the right time in the market. The high turnover funds are no exceptions. If the manager of a particular fund wants to dump the holdings at the wrong time, it means that the fund lost so much money in the form of taxes. Buying/selling holdings without following right market timings will bring loss to high turnover funds.

In summary, it is always better to give less importance to the turnover as a performance indicator. Always give priority to other performance indicators and if you want consider turnover as a complimentary performance indicator rather than the main indicator.