Capture Ratios: Meaning, Types and Calculation

When we invest in any actively managed mutual fund, our primary aim is to generate market-beating returns. For that, we trust the skills of the fund manager who invests pooled money in different assets. We ideally want the fund to give better returns than the benchmark when the markets go up. At the same time, we also want the fund to fall less compared to the benchmark when markets fall. 

Capture ratios can give us useful insights into how well the fund is managed during different market conditions.

Types of Capture Ratio and Calculations

To analyze the fund returns with respect to the benchmark returns, we use the capture ratio. The capture ratios indicate how the fund has performed during both upward and downward trends in the market.

The capture ratio can be divided into two parts:

Upside Capture Ratio: 

This can be calculated as 

Upside Capture Ratio = (Fund return during uptrend / Market return during uptrend)*100

For actively managed funds, the value of this ratio should ideally be above 100. A value lower than 100 shows that the fund is generating a lower return than the benchmark, which defeats the purpose of active fund management. 

A negative value of this ratio means the fund is going down during up trending market. This is a big red flag for any mutual fund.

Downside Capture Ratio:

This can be calculated as

Downside Capture Ratio = (Fund return during a downtrend / Market return during a downtrend)*100

For actively managed funds, the value of this ratio should ideally be below 100. A value higher than 100 shows that the fund is falling rapidly compared to the benchmark. This can lead to higher drawdowns during a market crash.

A negative value of this ratio means the fund is going up during down trending market (which is highly desirable).

You should check both capture ratios while analyzing any mutual fund. This will give you a better idea of the fund's performance during different market conditions. 

FAQs

Should I invest in a mutual fund that has a high value of both the upside and downside capture ratio?

A higher value of both ratios indicates higher volatility of the mutual fund. This generally happens with small-cap mutual funds. So, if you are a risk-averse investor, you can avoid this kind of fund. But if you are comfortable with higher volatility in exchange for high potential returns, you can consider the fund for further analysis. 

Are the Capture ratios and Beta of a mutual fund the same?

No. The beta of a mutual fund is calculated based on the covariance and variance, and It gives us an idea about the relative volatility of the fund with respect to the market. While capture ratios are used to check how effectively the fund manager captures the up moves and avoids the down moves.