![]() This could be counter-intuitive to a believer in the “buy and hold” mode of investing but is perhaps reflective of the fact that most actively managed mutual funds adopt active churn strategies to generate alpha, and not just accurate stock selection. % TO Ratio: Turnover less than 40% is not the highest performing bucket across categories. # Stocks: MF with portfolios in excess of 60 stocks are not the highest performing bucket across categories, except for the Large & Mid-Cap category, where the difference in 1 Year returns, between the > 60 bucket and the 30-45 bucket is minimal. ![]() Table : Returns by Equity MF category for various buckets of # of Stocks and % TO ![]() The attempt is to see if we could formulate a set of best practices for choosing a MF based on the above. The analysis is fairly straightforward, in that it breaks funds within each category into buckets, determined by the % TO ratio and # of Stocks held, checks the past 1 year returns in each bucket. I have looked at the key equity MF categories of Large Cap, Large & Mid-cap, Multi-cap, ELSS and Small Cap for the analysis. As the mutual fund industry has evolved over the years, so has the variation in # of stocks held, with focused funds (=60 stocks in many funds in this category). # Stocks: The number of stocks in a fund could also be a good marker of volatility / stability. Some funds hold their equity positions for less than 12 months, meaning their turnover ratios exceed 100% Turnover ratio: The turnover ratio or turnover rate is the percentage of a mutual fund or other portfolio's holdings that have been replaced each year (calendar year or whichever 12-month period represents the fund's fiscal year).įor example, a mutual fund that invests in 100 stocks and replaces 50 stocks during one year has a turnover ratio of 50%. Turnover Ratio and # of Stocks on the other hand, are simpler metrics, which are not very often looked at by the average investor, but whose effect could be much easier to quantify. Capital goods) could be more volatile vs funds that are concentrated more in non-cyclical sectors (ex. However, both the above factors could be multivariate in nature, with multiple possible permutations and combinations and subject to possible rapid change, hence difficult to exactly quantify their effect, even if the risk / reward of both A,B are broadly well understood, (a fund with exposure to large cap companies will tend to be less volatile vs a fund with higher exposure to mid and small sized companies), funds with higher concentrations in cyclical sectors (ex. Concentration(s) in specific industry sectors. Concentration in large/mid/small cap companies, andī. The above two are obviously not the only factors which determine the return / risk profile of an equity MF, other notable factors beingĪ. This article seeks to quantify the effect of both of the above, on the returns of a mutual fund. Both these factors should be looked at closely, when investing in equity mutual funds. Turnover ratio, Number of stocks held by an equity mutual fund, are both key factors that influence the potential returns from a mutual fund.
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