Turnover ratios: Disclosure necessary

Suresh Krishnamurthy

IN RECENT times, when it comes to portfolio-churning, mutual funds have been as busy as the foreign institutional investors, if not more.

This is evident when we observe the turnover details of mutual funds and FIIs in the first seven months of 2000.

The details indicate that there is a considerable degree of active fund management. However, the extent of active management is likely to vary with each equity scheme. For example, in the case of Kothari Pioneer Mutual Fund, the portfolio turnover varied from a high of 133 per cent for Kothari Pioneer Prima Plus to a low of 24 per cent in the case of the pharma fund. Unfortunately, not all mutual funds disclose the portfolio turnover of each of their schemes.

Portfolio turnover ratio over a period of time is an essential piece of information which would inform investors of the fund's investment strategy. A consistently higher portfolio turnover has an impact on the costs of the fund. While transaction costs in India, at around 0.5 per cent, are quite low and comparable to the developed markets, liquidity in the Indian market is quite low. The lower liquidity in the Indian market has a bearing on the price at which stocks can be bought or sold and, consequently, the performance of the fund.

In short, the risks associated with a higher portfolio turnover are higher in the Indian market than would normally be the case. As such, many schemes may not be suitable for all investors. This is especially true when all funds indicate a preference for long-term investing in their prospectuses which appears to suggest a buy-and-hold strategy rather than active fund management. In this backdrop, it is imperative that the disclosure of portfolio turnover in all offer documents is made mandatory.