Portfolio Turnover and its Effect on Performance of Equity-Oriented Mutual Fund Schemes: An Empirical Study in the Indian Context

Abstract

Portfolio turnover is a valuable tool to analyze the investment strategies of a Fund manager. The study aims at identifying portfolio turnover strategies of select equity/growth oriented mutual funds; study the effect of portfolio turnover ratio on fund performance; examine the relationship between Portfolio Turnover Ratio and Fund performance. Nine equity/growth oriented mutual fund schemes have been randomly chosen and the study was conducted using secondary data on 13 variables available at the home page of the AMCs operating the sampled mutual fund schemes for a period of three years during 30th September 2006 to 30th September 2009 in six half-yearly periods.The effect of change of Portfolio Ratios on Absolute Fund Return (AFR) and Performance of Fund relative to Benchmark index (FPB) was analysed. Four Hypotheses pertaining to Portfolio Turnover Ratio and fund performance were formulated and tested for statistical significance. Correlation coefficients were computed to ascertain the degree of association between (a) Portfolio Turnover Ratio and Absolute Fund Return; (b) Portfolio Turnover Ratio and Fund Performance relative to Benchmark Index; (c) Percentage change in Portfolio Turnover Ratio and Percentage change in Absolute Fund Return; (d) Percentage change in Portfolio Turnover Ratio and Percentage change in Fund Performance relative to Benchmark Index. Further, Covariances have also been computed to ascertain the extent to which the above four vary together. An analysis of the Portfolio Turnover Ratios (PTR) of the nine funds over the six half yearly periods indicates that the median PTR is 1.035 and the portfolios of all the nine funds are heavily invested in equity and equity related securities and the median is found to be 91.07%. Further, analysing the Profit/(loss) on sale/redemption of investments (other than inter-scheme transfer/sale) indicates that the fund managers are employing the strategy of sale/redemption to make significant gains to boost Net Asset Values in the short run, NAV being the prime concern of unit holders. The findings of the study were of mixed nature and lacks evidence that is statistically significant to suggest that increase in portfolio turnover ratio would result in enhanced performance of the fund which implies that high portfolio turnover ratios does not necessarily improve the fund performance consistently over a long time period.There is no conclusive evidence to suggest that there is significant relationship between portfolio turnover ratio and measures of fund performance used for this study, absolute fund return and fund performance relative to Benchmark index.