An Insight into Capture Ratios of Mutual Funds: Meaning, Examples, Types and How to Calculate?

Stock markets are inherently volatile. They experience bullish and bearish phases. In the former, they go up, while in the latter, they experience turbulence. If you want to measure the performance of your mutual fund during market ups and downs, capture ratios can help you do so. Let’s understand the various aspects of this ratio and see how you can use them.

Capture Ratio Meaning

The capture ratio helps measure the performance of mutual funds during upward and downward market trends in relation to the benchmark index. Expressed in percentage over different time periods, this ratio tells you how the fund manager has managed the fund during various market conditions.

Types Of Capture Ratio

There are two types of capture ratios, namely:

• Up-market or upside capture ratio

As the name suggests, an up-market or upside capture ratio helps evaluate a mutual fund's performance against its benchmark index during bullish market conditions. The up-ward capture ratio calculation formula is:

Up-ward capture ratio = (Mutual fund returns during bullish market / Benchmark index returns) X 100

An upside capture ratio of more than 100 is desired as it indicates that the mutual fund has gained more than the benchmark index. A fund’s upward capture ratio of 115 shows that it has outperformed its benchmark index by 15%.

• Down-market or downside capture ratio

The down-market or downside capture ratio is exactly the opposite of the up-market or upside capture ratio. It captures a mutual fund’s performance when markets are bearish. The down-market capture ratio calculation formula is:

Down-market capture ratio = (Mutual fund returns during bearish phase / Benchmark index returns) X 100

It is ideal to have a down-market capture ratio of less than 100. This is because it tells you that the mutual fund has performed better than the index. For instance, if the downside capture ratio is 90%, it shows that the fund has lost only 10% less than its benchmark during the bearish phase.

Essential Things To Note

While using capture ratios to compare mutual funds, you need to consider certain important things. These include:

• Using a capture ratio matching your investment horizon. For example, it is irrelevant to use a 3-year capture ratio to measure the performance of a 10-year goal.
• Choosing the benchmark for comparison should match the fund’s category. For example, if you want to understand the performance of a debt fund, you can’t choose the Sensex as a benchmark.
• Comparing capture ratios of funds of the same category. For instance, you can’t compare the performance of an equity fund with that of a debt fund.
• If up-market and down-market capture ratios are close to 100, it means the fund has performed the same as the benchmark when the market is up or down.

Using Capture Ratios To Choose A Mutual Fund

You can use the capture ratio in mutual funds to select a fund. The idea is to opt for a fund that gains more than the benchmark during bullish market conditions and loses less than the index when markets plummet.

While choosing, opt for a fund with a higher up-market ratio and a lower down-market ratio. Note that if the fund aims to outperform its benchmark, its capture ratio is close to 100. On the other hand, if the fund's objective is to contain losses during the bearish phase, the ratio should be less than 100.

Wrapping It Up

Using capture ratios to evaluate mutual fund performance can be a prudent way to measure their performance during market ups and downs. However, it’s wise not to use these ratios in isolation and consider various other factors like financial objectives, risk taking levels, and investment horizon before investing in mutual funds.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.