A mutual fund scheme has an average Net Asset value of Rs. 4,000 crore over a financial year. During the year, the scheme executed total security purchases of Rs. 6,000 crore and total security sales of Rs. 2,000 crore. What is the Portfolio Turnover Ratio (PTR), and what does a very high PTR indicate?

[ A ]PTR is 50% (Rs. 2,000 cr / Rs. 4,000 cr); a very high PTR indicates frequent portfolio churning and tactical trading, leading to higher transaction broking costs.[ CORRECT ]

[ B ]PTR is 150% (Rs. 6,000 cr / Rs. 4,000 cr); a high PTR indicates the fund manager is following a buy-and-hold value strategy.

[ C ]PTR is 200% (Rs. 8,000 cr / Rs. 4,000 cr); a high PTR guarantees zero brokerage expenses.

[ D ]PTR is 0% because purchases and sales cancel each other out entirely.

Takeaway

Option A is correct: PTR is 50% (Rs. 2,000 cr / Rs. 4,000 cr); a very high PTR indicates frequent portfolio churning and tactical trading, leading to higher transaction broking costs.

Derivation

Portfolio Turnover Ratio (PTR) is computed as: PTR = Lower of Purchases or Sales / Average Net Assets. Here, Sales (Rs. 2,000 cr) < Purchases (Rs. 6,000 cr). PTR = Rs. 2,000 cr / Rs. 4,000 cr = 0.50 or 50% (average holding period of 12 / 0.50 = 24 months). A high PTR (e.g., >100%) indicates aggressive, high-frequency trading and momentum churning, which incurs higher trading brokerage and transaction costs for the scheme. This tests portfolio analysis metrics. The primary trap is dividing purchases or total volume by AUM.

Why the others fail

B — PTR is 150% (Rs. 6,000 cr / Rs. 4,000 cr); a high PTR indicates the fund manager is following a buy-and-hold value strategy.

150% incorrectly uses the higher purchase figure (6,000 cr) instead of the lower transaction figure (sales of 2,000 cr).

C — PTR is 200% (Rs. 8,000 cr / Rs. 4,000 cr); a high PTR guarantees zero brokerage expenses.

200% erroneously sums purchases and sales (8,000 cr) in the numerator; high turnover increases broking costs rather than eliminating them.

D — PTR is 0% because purchases and sales cancel each other out entirely.

Purchases and sales do not cancel out; PTR measures active portfolio trading activity relative to scheme size.