What Is Capture Ratio

There can be many reasons to invest in mutual funds – portfolio diversification, better returns, long term wealth generation, tax savings etc. But before investing in a mutual fund scheme, you need to evaluate it. There are different parameters for evaluation -

·       Performance History (though past returns cannot guarantee future returns)

·       Risk v/s return

·       Costs of investing

There are many ratios to determine the performance of mutual fund schemes. One of them is Capture Ratio. Capture ratio measures the consistency of a scheme. It shows how the fund has performed relative to the benchmark. There are two components to the capture ratio -

Upside capture – This value puts forward the extent of the performance of the scheme in relation to the benchmark index when the index is on an uptrend. It is calculated as follows -

Upside capture  = 

Scheme's periodic return for a certain duration ÷ Benchmark return  for same period during the same duration

(when the benchmark has a positive return)

It is expressed in percentage terms.

For example, if the benchmark index returned 8% and the fund returned 10%, the upside capture ratio would be 125% which means the mutual fund scheme has performed better than the index by 25%. In another scenario, if the benchmark index returned 8% and the fund returned 6%, the upside capture ratio would be 75% which means the mutual fund scheme has under performed the index by 25%.

The higher the upside capture, the better

Downside capture - This value puts forward the extent of the performance of the scheme in relation to the benchmark index when the index is on a downtrend. It is calculated as follows -

Downside capture  = 

Scheme's periodic return for a certain duration ÷ Benchmark return  for same period during the same duration

(when the benchmark has a negative return)

It is expressed in percentage terms.

For example, if the downside capture ratio is 75%, it means that the mutual fund scheme has outperformed the benchmark index as it declined only by 75% of the total decline of the index. If the downside capture is 100%, it means the decline in the performance of the MF scheme is equivalent to the decline in the performance of the index.

If the downside capture ratio is 110%, it means that the mutual fund scheme has underperformed as compared to the benchmark index.

The lower the downside capture, the better

The ratios help us understand the volatility and the risk management of the scheme. Both the upside and the downside captures have to be taken together to get a true picture of the performance of the fund. If we take only upside capture into consideration, we will know only how the fund performs in good times. We will not get a clear picture. For example, we will never know how market risks are managed. If we factor only downside capture, we will only know how the scheme performs when the markets are down. We will not know the ability of the fund to beat market returns.

Here is how we take them together and evaluate the capture ratio -

Capture Ratio = Upside Ratio/Downside Ratio

If the capture ratio is greater than 100%, it means the fund has outperformed the index else it has underperformed as compared to the index.

Here are the capture ratios of some MF Schemes -

Details	Upside Ratio	Downside Ratio	Capture Ratio
Kotak Nifty Exchange Traded Scheme Benchmark – S&P BSE 100	94	97	0.96
Aditya Birla Sun Life Equity Fund Growth Benchmark – S&P BSE 500	98	94	1.04
ICICI Prudential Bluechip Fund – Growth Benchmark – S&P BSE 100	94	91	1.03

(Data from https://morningstar.in)

A upside capture greater than 100% indicates that the fund manager has generated returns higher than the  benchmark returns when market is rising. So if you are an aggressive investor, you might want to look at funds that have a high upside capture.

A downside capture Ratio that is less than 100% indicates that the manager has protected the fund from risks when market is falling. If you are averse to risk, you should target funds that have a low downside capture.

A capture ratio above one indicates good risk adjusted returns. A capture ratio below one indicates that the MF scheme has not underperformed the benchmark.

As an investor, you can use these ratios along with other performance indicators to select MF schemes to invest in and to monitor your mutual fund portfolio.