Itís all about the recipe. Just like
successful cooking, a fundís ability to fulfil the moneymaking objective
of a scheme is determined by its recipe. The recipe for a scheme is its
portfolio, which is mix of the investments the fund intends to make for
The fund invests its assets by buying
a mix of various securities like stocks or bonds. Depending on the schemeís
objective (about which we tell you later), the fund manager fixes the
investment recipe or the portfolio. The portfolio, on any day, consists
of the various securities the fund has invested in. By purchasing into
a scheme you become a part owner of that portfolio.
Consider, one of the market favourites,
Birla Advanatge Fund, a growth scheme with 26.43% of its portfolio in
Infosys, 14.75% in VisualSoft and another 8.22% in SSI. With an investment
of Rs.50,000 in the scheme you could own Rs.13,215 worth of Infosys, Rs.7375
of VisualSoft and Rs.4110 of SSI. Likewise you would own 27 other stocks
that the scheme has put its money in. Hmmm, isn't that more satisfying
than purchasing seven stocks of Infosys on your own with the same money?
Great cuisine, as the world knows, also
depend on precise timing and correct estimations. By how much and when
does a fund manager change his investment mix? The portfolio of a fund
never remains the same for a long time. Is the fund manager's investment
strategy one of buy and hold? Or is he a one who aggressively churns the
fund? But most importantly, is he taking the right decision at the right
time? Though as investors we don't always get to know when a manager is
changing the scheme's portfolio, we can periodically keep track of the
scheme's trading history.
Most schemes periodically announce their
current portfolio though not all of them declare them as when the fund
manager makes a change. As specified by the Securities and Exchange Board
of India (SEBI) funds are supposed to declare their portfolio at least
once every year.
The frequency with which a portfolio
is churned is indicated by the turnover ratio, which is expressed as a
percentage. A fund with a 100% turnover generally changes the composition
of its entire portfolio each year. Low turnover of about 20-30% shows
a fund following a cautious strategy i.e., buying stocks and holding them.
Turnover in excess of 100% shows a fund into active trading i.e., one
that sells and buys stocks very often.
Hold it. Technically speaking, a turnover
ratio is a ratio comparing the rupee value of fund purchases or sales
to the rupee value of total fund assets during the year. Hence, a 100%
turnover ratio could also indicate that only a portion of the entire portfolio
has been traded intensely over the last year.
Higher the turnover more the trades
a fund does and hence greater are the transaction fees in the form of
brokerage, custody fees, registration fees etc. that a fund has to pay.
For a fund such high transaction costs affects its performance and the
NAV. And as an investor you get less returns. Moreover, a fund with high
turnover will also be making money more often as capital gains. These
capital gains on distribution are open to taxes, which again would mean
less returns for a untiholder.
A change in a fund's general turnover
pattern can indicate changing market conditions, a new management style
or a change in the fund's investment objective.
Getting back to cuisine talk. Do you
stop frequenting the Udupi joint round the corner just because a new cook
cooked your favourite appam even if it was to your liking? Similarly,
there is not much reason to opt out of a fund just because it has a new
manager. Managers usually work to the fund house's objective set for a
scheme. However, do keep track what the new manager is upto. Is the manager
handling the portfolio in a way that it reflects the fund's objectives?
If the new manager churns the portfolio upside down, it might mean more
capital gains distributions, and hence more taxes. Obviously then, (and
before appams start tasting like idlis) time you looked
for another fund.