Understanding Mutual Fund holding ratio

Understanding Mutual Fund holding ratio

A number of factors have to be taken into consideration to assess the performance of a Mutual Fund. One such factor is the holding ratio or turnover ratio of the Fund. If you are new to Mutual Fund investments, you should have a clear idea about the term, its implications and how it is calculated. Read on to know all about it.

What is a holding or turnover ratio of a Mutual Fund?

A holding ratio is the number that reflects the extent of annual changes in the portfolio of a Mutual Fund. It can range from 0 to 100 percent, though it can go even higher for the funds that are actively managed. The higher the percentage, the greater is the change in the holdings of the fund. So a turnover rate of 0% indicates that the holdings are constant as compared to the year before.

It is important to mention that though a 100% rate means a totally new portfolio, it doesn’t mean that all the assets have been sold at the same time. But they surely have been sold to make new investments in its place. Usually, a high return Mutual Fund has a turnover rate of 100% or above.

Finding the holding ratio of a Mutual Fund

The holding ratio of a Mutual Fund refers to the minimum sold or purchased stocks under the fund divided by the average assets under management. Though you can consider the time horizon either monthly or annually, remember to take the AUM and the stocks from the same time period. The holding ratio is always mentioned in percentage.

Here is the formula to calculate the portfolio turnover or holding ratio:

Minimum stocks sold or purchased/average Assets Under Management = Mutual Fund holding ratio.

Holding ratio for different types of funds

Before you invest in a Mutual Fund, it is important to remember that the holding ratio also varies according to the type of the fund as elaborated below:

Indexed Mutual Funds

Since these funds are passively secure, they naturally have a lower turnover ratio. Indexed Funds aim to track certain indices and don’t need constant management. In this case, stocks change in the fund according to changes in the underlying index.

Active Mutual Funds

Active Mutual Funds have the highest turnover rates. Fund Managers are constantly on the lookout to sell high, find undervalued assets and make the most profitable deals. Thus, there is a lot of buying and selling annually. You would hardly ever see an active fund that has high returns but a low holding ratio.

Value Mutual Funds

The low turnover ratio of Value Mutual Funds stem from their basic investment philosophy. These Funds take undervalued securities from the market, keep them until their value rises and then finally sell them at a profit. Thus, the underlying assets can remain unchanged for months in this type of Mutual Fund.

The endnote:

Now that you have a basic idea about holding ratios, you will find it easier to assess the performance of your Mutual Fund investments. If you want more information about Mutual Fund holding ratio or any other features of a Fund, contact an ICICI Bank representative right away. ICICI Bank Mutual Funds bring you the power of compounding and a diversified portfolio that minimises risks. Invest in Mutual Funds with us at low amounts and let us guide you along a safe and secure investment journey.

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