Investor’s Guide: Understanding Upside and Downside Capture Ratios

The upside and downside capture ratios underline a mutual fund’s performance during market rallies (rapid rise in share prices) as well as corrections (when the stock index falls by more than 10%). The upside capture ratio is used to analyse the performance of an investment or fund manager when the benchmark index has risen. 

Along with other risk measures, upside and downside capture ratios are a handy tool for monitoring a holdings’ performance and undertaking due diligence on possible additions to the portfolio of an investor.

In case a mutual fund’s upside capture ratio is greater than 100, this means that the fund, on average, has performed better than the benchmark during the period of positive returns. For instance, a mutual fund that has an upside capture ratio of 150 highlights that it has gained 50% more than its benchmark in bull runs. The ratio is expressed in percentages.

An investor is able to gauge how much more returns the mutual fund has earned as compared to the benchmark index. 

The upside capture ratio is calculated by dividing fund returns by the benchmark returns multiplied by 100 during an upmarket period. 

On the other hand, the downside capture ratio is used to analyse how a fund manager performed when the benchmark index had taken a dip. 

With this ratio, an investor gets an idea of how much lesser returns the mutual fund or the scheme has lost as compared to the benchmark index at the time when the stock market witnessed a drop. 

A downside capture ratio of lower than 100 shows that a particular mutual fund has lost less than its benchmark index during the phase of dull returns. The downside capture ratio is calculated by dividing fund returns by the benchmark returns multiplied by 100 during a phase of a down market. 

Basically, capture ratios are usually calculated in percentages for periods of 1 year, 3 years, 5 years, 10 years, and 15 years. As an investor, it is crucial to use the capture ratio which is appropriate for the set investment goal. 

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