Portfolio Turnover Case Study

955 Words4 Pages
This study is based on how the portfolio turnover ratio affects the returns of the mutual funds. Portfolio turnover is a valuable tool to analyze the investment strategies of a Fund Manager, fund cost structure and tax exposure. It helps in measuring how actively the Fund manager manages the portfolio investment. The rate of trading activity in a fund’s portfolio is the lesser of purchases or sales of the portfolio securities for a financial year divided by the average value of portfolio securities during the year. If a fund has 100 percent turnover rate that means the fund manager, in theory has sold every single stock position once. Portfolio turnover is an important component to assess the management style of a fund. Each trade (buy/sell) costs brokerage commissions, even though mutual funds pay lower commissions than individual investors, it was observed that brokerage costs can account for 0.5% to 2% assets managed; smaller funds with high rates of portfolio turnover have higher costs. For tax purposes, brokerage commissions are considered as “capital costs” as they are considered part of the cost of the securities purchased and hence are not part of the Management Expenses Ratio. Trading expenses, which include brokerage…show more content…
John Bogle, founder of the Vanguard mutual fund family and father of the index fund, and Warren Buffett, likely the most successful investor of the 20th century, both speak out against high turnover in investment portfolios as an activity that serves only to reduce the returns assets can generate. Mr. Buffett places patience high on his list of qualities that make an investor successful. He is noted for saying that he only buys stocks that he would be satisfied holding if he knew that the stock market was going to be closed for the next ten years. Buffett says that ‐ “I often make more money when I am snoozing than when I am

More about Portfolio Turnover Case Study

Open Document