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Capture Ratios | What is it, Types, Use of Capture Ratio

  • Akarshita Yaji
  • Jan 12 2022
  • 6 minutes
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Every time you make an investment using any investment scheme, there arises a need to measure/gauge the performance of the investment. There are different metrics to serve that purpose; among which capture ratio is one of the most useful, as it is greatly effective in analysing mutual fund investments.

If you are an investor, who invests in mutual funds and/or similar scheme(s), it will surely help you if you know about capture ratios in a little more detail.

What is a Capture Ratio?

As mentioned above, capture ratio helps the investor to measure the performance of investment during upward and downward market trends.

Capture ratios also help in evaluating the fund’s past performance and its ability to face any turbulence in the market. It is a representation in statistical form of performance of the fund manager in management of the fund.

Types of Capture Ratios 

There are basically two types of capture ratios— Down-market or downside capture ratio and Up-market or upside capture ratio. Both have their own features and characteristics. Let’s go through both these ratios separately in detail.

  1. Up-market or Upside capture ratio-
  • Up-market capture ratio is used to evaluate a fund’s performance when the benchmark has risen, that is during market bull runs. It helps you know the amount of returns earned by the fund in comparison to the benchmark.
  • Up-market or upside capture ratio is calculated by the following formula:

 Upside Capture Ratio = ( Fund returns during bull runs / benchmark returns ) * 100 

  • An upside capture ratio above 100 is considered to be good as it shows that the funds earned more returns in comparison to the benchmark during the market bull runs.

For example: Parth’s investment has an upside capture ratio of 140. This shows that his fund gained 40% more than the benchmark.

2.  Down-market or Downside capture ratio-

  • Down-market or downside capture ratio is used to evaluate a fund’s performance when the benchmark has fallen, that is during a bearish trend in the market. It helps you know the amount of returns lost in comparison to the benchmark.
  •  Down-market or downside capture ratio is calculated using the following formula:

Downside Capture Ratio = ( Fund returns during bear runs / Benchmark returns )* 100

  • A downside capture ratio below 100 is considered to be good as it shows that the funds lost are less in comparison to the benchmark during the bearish market trends.

            For example: Sheetal’s investment has a downside capture ratio of 70.

            This indicates that her investment lost 30% less than the benchmark.

Use of Capture Ratios while selecting mutual Funds

When selecting which mutual fund to invest in, Capture ratios have proved to be very helpful. As we already know that the upside capture ratio deals with the gains and the downside capture ratio deals with the loss experienced by the funds, we can use this knowledge while selecting mutual funds.

The key rule is to invest in a fund which has more gains with an upside capture ratio above 100 and less losses with a downside capture ratio below 100. To put it in simple words, you need to choose an investment which has the highest upside ratio and the lowest downside ratio.

It is important that you set a goal for your fund and check its performance accordingly. 

For example: Priya wanted her fund to surpass the benchmark and make more gains. Her fund got an upside ratio of 150 which means her fund gained 50% more thus, achieving her goal. On the other hand, Akshay wanted his fund to prevent as much loss as possible. But, his fund could not get to a downside capture ratio below 100 and was stuck at 100. This means Akshay’s fund did not achieve its goal.

Important points regarding Capture Ratios that you need to Consider 

Now that you are familiar with the term capture ratios and know about it in a little more detail, it is important that you know all the things you need to consider while dealing with capture ratios and while using them for selecting a mutual fund. Following are a few important things you must know as an investor-

  • Capture ratios are usually calculated in percentages for periods of 1 year, 3 years, 5 years, 10 years, 15 years and so on. Therefore, it is important to use the capture ratio which is appropriate for your investment goal. For instance, if your investment goal is for 5 years, using a 1 year capture ratio will not be useful and will be irrelevant.
  • If both your upside and downside capture ratios are 100 or very close to that, it means your fund is performing similarly during both bull runs and bearish trends. This, in turn means that you are losing as much during bearish trends as it is gaining during bull runs. 
  • Although having a good upside capture ratio indicates high gains, it does not mean that the fund is immune to having a high downside capture ratio. A fund having an upside capture ratio above hundred can have a downside capture ratio of 100 or more thus, performing poorly during bearish trends in the market. This goes both ways. A low downside capture ratio also does not mean a high upside capture ratio.
  • You also need to keep in mind that a fund should always be compared to the benchmark in the same category. Which means you cannot compare an investment made in a debt fund to a benchmark of an equity fund.
  • If a capture ratio is negative, it indicates that the fund has gone up while the benchmark has gone down.

Conclusion

So, to conclude, capture ratios are an important tool to measure the past performances of the investment as well as to make the right selection while choosing a mutual fund. Both up-market and down-market capture ratios help you to evaluate the fund’s performance during market bull runs and bearish trends respectively, which gives you more clarity about the investment. If you as an investor put your knowledge of these ratios to right use, you have a very good chance of making the right investment and gaining profits over time.

FAQs

  1. Can capture ratios of funds of different categories be used to compare them?
    Capture ratios can also be used for comparing funds that belong to the same category. For example, the capture ratio of an ETF cannot be compared with that of an equity fund.
  1. What role does an investment period play in determining a capture ratio?
    The investment period is important in calculating a capture ratio. For instance, a capture ratio of 3 years cannot be taken for an investment that will last for 10 years.
  1. Is the capture ratio similar to the alpha of a mutual fund?
    It is similar in the fact that the capture ratio measures how the fund manager has managed the fund during different market conditions to address risks.
  1. What is an along-side up-market?
    The down market ratio is considered to be  the alongside up-market ratio.
  1. To which individuals is an up-market ratio especially useful?
    The up-market ratio is especially useful for individuals who seek relative returns instead of absolute returns or returns from active management of funds.
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