Capture Ratio - Defination with Example & Types

Types of Capture Ratio

There are two types of capture ratio – upward capture ratio and downward capture ratio. We will have a look at both of them.

Upward Capture Ratio

When the market is bullish, the up-market or upside capture ratio compares an investment's performance to a benchmark index.

 An up-market capture ratio of greater than 100 indicates that a mutual fund has outperformed its benchmark. For example, if the capture ratio calculated comes to 120 then it means that the fund has done exceedingly well by outperforming the index by 20%.

An indicator of reliable goods and fund managers for investors is the up-market capture ratio. It is especially beneficial for people who actively manage their funds or desire relative returns rather than absolute ones.

The formula to calculate the Upward Capture Ratio is:

(A fund’s returns during an upside market/Benchmark returns) x 100

Downward Capture Ratio

This ratio assesses a mutual fund's performance relative to its benchmark index during periods of low returns or when the market is bearish for the benchmark. It is derived by dividing the fund's return during times when the benchmark returned less than the fund's return.

If the ratio is smaller than 100, it is likely that the fund has suffered less during market downturns than the benchmark. For example, if the ratio calculated comes to 80 then it means that just 80% as much loss as the benchmark has been experienced by the investment.

The formular to calculate the Downward Capture Ratio is:

(A fund’s returns during a downside market/Benchmark returns) x 100

Example of upside and downside capture ratio for a bluechip fund

Given below in the table is an example of upside and downside capture ratio:

According to the aforementioned upside and downside capture ratios, investing in this specific bluechip fund for 5 years will result in positive returns for investors. On the other hand, investing for fewer than five years can result in a loss.

Things to note about Market Capture Ratio

Some of the things you must note about Market Capture Ratio are given below:

1. If the upward market ratio and the downward market ratio is 100 and close to 100 respectively, it indicates that the fund has performed the same as it benchmarks during the time when the market was up or down. This means that when the market was bullish, the fund gained while it also lost its value when it was bearish.
2. You must note that if a fund has a ratio of more than 100 during the time when the market was bearish, there is a chance that the fund may perform poorly too if the market is bearish.
3. Mutual Funds belonging to a certain asset class are measured against a certain index. If the asset manager’s investment portfolio is different from the fund’s benchmark, then the upside and downside capture ratio will have contrasting values.
4. A negative capture ratio may suggest that the fund has grown while the benchmark has fallen down. In the same manner, an upside or downside market ratio shows that a fund may go up when the market might be performing positively or negatively and vice versa.

Capture Ratios to Consider when selecting Mutual Funds

1. One factor used to compare mutual funds is capture ratios. It shows whether a particular fund is meeting its investment objective.
2.  For instance, a fund is not performing as it should if its goal is to outperform the benchmark, but it's up-market capture ratio is less than 100. Similarly, if a fund's objective is to limit losses in a bear market, but its ratio is higher than 100, this also suggests underwhelming performance.
3.  The fund manager's inability to increase the variety of the portfolio to reduce losses is also shown by such ratios.
4.  Investors should seek out items that have done very well and have the biggest upside percentage and lowest downside percentage.

Things to keep in mind when Comparing Capture Ratio

Some of the thins to keep in mind when comparing capture ratio are given below:

1. The capture ratio must be used to compare funds belonging to the same category. For example, you cannot compare the capture ratio of an equity fund with the capture ratio of a debt fund.
2. It is important that the fund category matches the mutual fund’s benchmark index.
3. You will have to take into account the investment period when comparing. If your investment period is 10 years, then you cannot compare it with a capture ratio of 5 years.

Capture Ratios to Consider when selecting Mutual Funds

1. One factor used to compare mutual funds is capture ratios. It shows whether a particular fund is meeting its investment objective.
2.  For instance, a fund is not performing as it should if its goal is to outperform the benchmark, but it's up-market capture ratio is less than 100. Similarly, if a fund's objective is to limit losses in a bear market, but its ratio is higher than 100, this also suggests underwhelming performance.
3.  The fund manager's inability to increase the variety of the portfolio to reduce losses is also shown by such ratios.
4.  Investors should seek out items that have done very well and have the biggest upside percentage and lowest downside percentage.

Things to keep in mind when Comparing Capture Ratio

Some of the thins to keep in mind when comparing capture ratio are given below:

1. The capture ratio must be used to compare funds belonging to the same category. For example, you cannot compare the capture ratio of an equity fund with the capture ratio of a debt fund.
2. It is important that the fund category matches the mutual fund’s benchmark index.
3. You will have to take into account the investment period when comparing. If your investment period is 10 years, then you cannot compare it with a capture ratio of 5 years.