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Mutual funds are a popular choice today since people are looking for higher returns than those offered by traditional financial instruments such as fixed deposits, recurring deposits, etc. But remember that a little awareness about the market, finance, and most importantly, how to pick the right fund goes a long way in making money through mutual funds.Looking at the stock market's extreme and volatile behaviour, it becomes difficult to assess a mutual fund's performance by just looking at the past performances.When it comes to assessing a mutual fund, the capture ratio is an important ratio to gauge a mutual fund performance. Let’s understand what exactly is capture ratio.
What is Capture Ratio?
The capture ratio reflects the ability and strength of a fund to perform in highly volatile market situations. It is expressed in percentage and reflects whether the mutual fund has underperformed or outperformed a benchmark index such as Nifty, Sensex, etc., during the market highs and lows. It is generally calculated for a period of 1, 3, or even 5 and 10 years.For example, if the stock market jumps up by 20%, and the mutual fund under consideration jumps by 25%, we can say that the mutual fund has captured 125% of the market movement (25%of 20%). Hence the capture ratio here is 1.25.There are two types of capture ratios calculated for the assessment of a Mutual Fund:
- Upside Capture Ratio: Reflects a fund's performance during a bullish trend, i.e. when the benchmark index is rising.
- Downside Capture Ratio: Reflects the fund's performance during a bearish trend, i.e., when the benchmark index is falling.
Calculation of Capture Ratio
The upside capture ratio is calculated as:
| (MF returns during bullish trend)/(returns of the benchmark index) * 100 |
An upside capture ratio of more than 100 indicates that the MF has performed above the benchmark index during the period considered. The downside capture ratio is calculated as:
| (MF returns during bearish trend)/(returns of the benchmark index) * 100 |
A downside capture ratio of less than 100 indicates that the MF has lost less than the benchmark index during the period considered.
Where and How to Use Capture Ratios to Assess a Fund?
You can visit websites to access the various measures related to the fund's performance, risks, rating, and other facts. The capture ratio can be tracked under the “risks and Ratings” tab. A drop-down menu is also provided to select the period for which you want to access the capture ratio.Once you have the capture ratio figures, you must know the right way to analyse a fund. The ideal mutual fund for you will be the one that beats the benchmark during the boom period; rather, it is one that loses less than the benchmark when the market is low. Hence, if you are comparing several mutual funds, pick the ones with the highest upside capture ratio and lowest downside capture ratio.While comparing the fund, you may consider taking the capture ratio for different periods (3 years, 5 years, 10 years) for a better understanding. Also, you must compare funds that fall under the same category for an effective comparison.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
