The churning rate in mutual funds (MFs), though not a key metric, can prove to be useful to investors for analysing the investment strategy. In our bl.portfolio edition dated March 12, we explained the meaning of portfolio turnover, calculating the same and how investors can use it to keep a tab on the churning rate of an MF. Across categories, certain funds typically churn higher than others. Here, we will check the sources of their high portfolio turnover and if high churning has helped them deliver higher returns over the last one year.
Funds with high portfolio turnover
Portfolio turnover shows the number of the portfolio has been changed over a period of time. Typically, portfolio turnover more than 50 per cent is considered to be significant. Hence, we analysed the performance of the large-, mid- and small-cap MFs having trailing 12-month portfolio turnover of more than 50 per cent.
As per ACE MF data, within the large-cap space of over 69 funds (including index funds), seven (around 10 per cent) have portfolio turnover over 50 per cent. These funds have returns ranging from 19.5 per cent to 27.18 per cent. Edelweiss Large Cap fund, with the highest portfolio turnover in the category — 128 per cent, has also delivered the highest return. Along with high churning of stocks, high portfolio turnover may have also resulted from the funds using derivatives for enhanced returns.
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Among large-cap funds with more than 50 per cent turnover, Mahindra Manulife Large Cap has the least returns (19 per cent) and has also underperformed the large-cap category average returns. For the Mahindra fund, portfolio turnover was 94 per cent, which could have been due to high fund inflows. Other funds such as Invesco Large Cap, HSBC Large Cap, and JM Large Cap with high portfolio turnover have performed in line with the category average returns.
Among all three fund categories, the mid-cap space has the highest proportion of funds with high portfolio turnover (10 out of 29 funds or nearly 38 per cent) over the last one year.
Also, the category average portfolio turnover of mid-cap funds has been 52 per cent. These funds have delivered returns ranging from 26 per cent to 39 per cent. Quant Midcap has the highest portfolio turnover (163 per cent) driven by both churning and strong fund inflows, and has delivered return of around 32 per cent, slightly outperforming the category. Motilal Oswal Midcap Fund and Taurus Discovery Fund are among those with portfolio turnover as high as 140 per cent and 87 per cent, purely driven by churning. Sector rotation in the Motilal scheme has helped the fund earn 39 per cent return over the last one year and has emerged as one of the best category performers. ICICI Pru Midcap and PGIM Mid cap Opportunities (saw good fund inflows) witnessed high portfolio turnover, but underperformed category, delivering around 22 per cent return.
Of a total 25 small-cap funds, six have high portfolio turnover. Contrary to other categories, in the small-cap space, two index funds — Nippon India Nifty Smallcap 250 Index Fund and Motilal Oswal Nifty Smallcap 250 Index Fund — feature in the list. With the small-cap stock universe being much larger than mid-caps and large-caps, there are high chances of frequent rebalancing of stocks in the index and subsequently in small-cap index funds.
The six funds with high portfolio turnover have delivered 20-43 per cent returns. Here, Quant Small Cap Fund, with high churning and inflows, has outperformed the category by delivering 44 per cent returns. Interestingly, PGIM India Small Cap, which has the highest portfolio turnover (153 per cent) in the category, underperformed the category with 20 per cent return.
Investor takeaways
There have been funds like Edelweiss Large Cap, Motilal Oswal Midcap and Quant Small Cap which have high portfolio turnover and have been amongst the best performers in their respective categories. On the other hand, funds having high portfolio turnover such as Mahindra Manulife Large Cap, ICICI Pru Mid Cap and PGIM Small Cap have underperformed their respective category average returns.
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Though high portfolio turnover might not guarantee returns above the category average, it is expected that if a fund manager is involved in higher trading activity, the MF is expected to generate high-risk adjusted returns to compensate for costs such as brokerage and security transaction tax. Ultimately, it is the investors’ choice to go for funds with buy-and-hold strategy or high churning bias.
Also, before making a decision based on portfolio turnover, investors should know the source of that turnover — whether it is actually due to churning or other reasons like fund inflows.