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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection

While selecting an equity scheme for a client, a distributor notes that the scheme's portfolio turnover ratio is very high compared with peers. What is the most relevant implication?

A very high portfolio turnover ratio implies frequent trading, so transaction costs such as brokerage are likely higher and may reduce net returns to investors. It does not guarantee better performance or protect the NAV, so it should be considered alongside returns, risk and style.

  1. AThe scheme is guaranteed to deliver higher returns
  2. BTransaction costs are likely higher, which may reduce net returnsCorrect
  3. CThe scheme must be a debt fund
  4. DThe scheme's NAV cannot fall

Explanation

A high portfolio turnover ratio means frequent buying and selling, which raises brokerage and other transaction costs that affect returns. It does not guarantee performance, and it says nothing about the scheme being a debt fund or NAV protection.

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