Every time you make an investment using any investment scheme, there arises a need to measure/gauge the performance of the investment. There are different metrics to serve that purpose; among which capture ratio is one of the most useful, as it is greatly effective in analysing mutual fund investments.
If you are an investor, who invests in mutual funds and/or similar scheme(s), it will surely help you if you know about capture ratios in a little more detail.
As mentioned above, capture ratio helps the investor to measure the performance of investment during upward and downward market trends.
Capture ratios also help in evaluating the fund’s past performance and its ability to face any turbulence in the market. It is a representation in statistical form of performance of the fund manager in management of the fund.
There are basically two types of capture ratios— Down-market or downside capture ratio and Up-market or upside capture ratio. Both have their own features and characteristics. Let’s go through both these ratios separately in detail.
Upside Capture Ratio = ( Fund returns during bull runs / benchmark returns ) * 100
For example: Parth’s investment has an upside capture ratio of 140. This shows that his fund gained 40% more than the benchmark.
2. Down-market or Downside capture ratio-
Downside Capture Ratio = ( Fund returns during bear runs / Benchmark returns )* 100
For example: Sheetal’s investment has a downside capture ratio of 70.
This indicates that her investment lost 30% less than the benchmark.
When selecting which mutual fund to invest in, Capture ratios have proved to be very helpful. As we already know that the upside capture ratio deals with the gains and the downside capture ratio deals with the loss experienced by the funds, we can use this knowledge while selecting mutual funds.
The key rule is to invest in a fund which has more gains with an upside capture ratio above 100 and less losses with a downside capture ratio below 100. To put it in simple words, you need to choose an investment which has the highest upside ratio and the lowest downside ratio.
It is important that you set a goal for your fund and check its performance accordingly.
For example: Priya wanted her fund to surpass the benchmark and make more gains. Her fund got an upside ratio of 150 which means her fund gained 50% more thus, achieving her goal. On the other hand, Akshay wanted his fund to prevent as much loss as possible. But, his fund could not get to a downside capture ratio below 100 and was stuck at 100. This means Akshay’s fund did not achieve its goal.
Now that you are familiar with the term capture ratios and know about it in a little more detail, it is important that you know all the things you need to consider while dealing with capture ratios and while using them for selecting a mutual fund. Following are a few important things you must know as an investor-
So, to conclude, capture ratios are an important tool to measure the past performances of the investment as well as to make the right selection while choosing a mutual fund. Both up-market and down-market capture ratios help you to evaluate the fund’s performance during market bull runs and bearish trends respectively, which gives you more clarity about the investment. If you as an investor put your knowledge of these ratios to right use, you have a very good chance of making the right investment and gaining profits over time.
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