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How To Use Capture Ratios To Evaluate A Mutual Fund?


Capture ratio is another important ratio or metric that can be used to study or evaluate a mutual fund and more particularly its historical performance as well as its strength to face the market headwinds.

How To Use Capture Ratios To Evaluate A Mutual Fund?

As the Indian stock market buoyed by global cues is reaching new notches every week, investors are enthused to take the mutual funds route to make gains. Nonetheless, before taking a dig, they need to know about the risk as well as some degree of market and financial knowledge. Here we shall discuss one such parameter capture ratio which is often neglected during investment literacy on mutual funds.

Capture ratio: It simply breaks down the annualized return to reflect the under or over performance of the fund category taking some benchmark into consideration such as Sensex, Nifty etc. The ratio measured in percentage terms is computed for one, three or even for longer durations.

= Geometric mean of fund returns + Index returns over the given time period for both the duration when the fund was down and up.

So, as a whole, the ratio or measure is depictive of the fact as to whether the fund has lost less or gained more in comparison to the benchmark index during the market phases of high and low and the degree of gain or loss as well.

Notably, the broader capture ratio has two facets to it, up-market capture ratio and down-market capture ratio.

Up-market capture ratio: The ratio highlights the performance of the fund manager with respect to the performance of the index as and when the index has scaled higher.

Up-market capture ratio= Fund Manager's return/ Index return * 100

The monthly or annual return of the fund during the given period of upswing is determined for a given set of month or years. Thus a figure over 100 is indicative of the fact that in comparison to the index returns, the fund manager has succeeded in providing a return higher by 25% to its investors.


Down-market capture ratio: In a similar working, the ratio measures the performance of the fund manager against the index during the time when the markets have gone down.

Down-market capture ratio= Fund Manager's return/ Index return * 100 during the time when index has dropped.

A value of less than 100 indicates that in comparison to the index, the fund has shown lower loss say a figure of 80 represents that the fund has lost just 80 percent or captured just 80% of the index losses in comparison.

So, all in all, the capture ratio is reflective of the fund manager's ability to provide better risk adjusted returns in comparison to the index returns.

When studied carefully with other metrics, the mutual fund selection can be made easy and investors should go for funds with higher up-market capture ratios and lower down-market capture ratios.

Read more about: mutual fund
Story first published: Monday, September 3, 2018, 14:39 [IST]
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