Sometimes it isn’t easy to choose a type of fund. In a place of marketing, every company will face ups and downs. So to analyze the performance and to make decisions, capture ratios are used. Capture ratios are of two types: upside and downside capture ratios. Based on this, every investor can check his/her funds. But what are Mutual funds? How can capture ration analyze them?
In this article
Every fund will have a benchmark at-last that has to get overcome to get returns. These returns are well known as “benchmark returns.” Capture Ratio analyses the performance of your mutual funds in the market. It represents the strength of mutual funds to face the challenges in the market. Whenever the market fluctuates, it isn’t easy to choose the right one to invest in. Now, this depends on its execution against a broad-based benchmark such as the Nifty50 or S&P BSE Sensex. Capture ratios are generally expressed in percentage. The time duration of this analysis is one, three, five, ten, and fifteen years.
Types Of Capture Ratios
1. Upside Capture Ratio:
This ratio is used to find a fund manager’s performance when the benchmark is at its peaks. It is calculated as;
Upside capture ratio= (Fund returns during bull runs/Benchmark Returns)*100.
It shows the performance of the fund manager at the times of bull runs. The ratio is expressed in percentage. Basically, the benchmark is set up at 100, and when the upside capture ratio is more than 100, it indicates that fund returns are high. For example, when the upside capture ratio is 120%, the funds have overcome the benchmark value by 20%. If a company has more upside capture ratio over the past 10 years, you can choose them for your investment.
2. Downside Capture Ratio:
This ratio is used to find a fund manager’s performance when the benchmark has fallen. This indicates that the fund has not managed to meet the benchmark during this period. For example, if the downside capture ratio is 80%, while the benchmark is set at 100%, there is a 20% loss in the period of bear runs. An investor has to keep in mind that his funds always have to meet the benchmark value. Keeping this in mind, the fund manager has to act wisely!
Downside Capture Ratio is calculated as;
Downside Capture Ratio= (Fund returns during bear runs/Benchmark Returns)*100.
Another measure of the downside risk is “Maximum Drawdown.” It is the maximum fall in the fund’s NAV(net asset value) during any market downturn. It is calculated during the market downturn from the market peak to the valley date.
The overall capture ratio is the ratio of upside and downside capture ratios. If it is >1, then it represents a good performance of the fund manager.
How To Use Capture Ratios For Mutual Funds Analysis
Remember that funds have to return more than benchmark during bull runs and lose less during a bust. Capture Ratios are used to select the right ones. So choose the one that has more returns and fewer losses.
Always act like a competitor and choose the fund that competes well in the market. When your fund goal is to beat the benchmark, and your capture ratio is 100(benchmark value) then, it is said that the fund is not achieving its goal, and you have to work smart. Similarly, when the fund goal is to prevent losses, then make sure that the downside capture ratio is not so down than the benchmark value.
To understand it better, let us for an example. Two companies, A and B, almost have an equal index value from the past 10 years in the fund chart. When you look into the chart of 3years, A has more upside capture ratio and less downside capture ratio, and B also has more upside capture ratio but more downside capture ratio. You will then choose A over B, but I suggest you wait till 5 years chart has released and checked the two companies’ capture ratios. Even if the 5 years chart has the same results, then it better to choose A. This decision should not be based on upside capture ration but downside capture ratio. Don’t always run to get the profit act smart and take every step gradually and wait for the magic!
What Are Mutual Funds?
A common pool where a group of investors can contribute their savings for its development is called a “Mutual Fund.” Money is gathered from all the investors by fund managers. The fund manager himself check the best investing company where growth is more. The gathered money is then invested in different companies, either in stocks, bonds, money market instruments, or gold. Money can be invested according to the investment aim. And this can be checked by the investor and basically operated by a fund manager.
Mutual Funds have some categories that you have to look up;
- Equity funds: these funds are invested only in stocks and some other equity instruments.
- Debt Funds: These funds are invested only in fixed income instruments.
- Money market funds: these are invested in short-term money market instruments.
- Hybrid funds: To create a balance between equity and debt funds, these funds are invested.
When an investment is made in groups, the amount is divided equally among the investors, and some money in the profit will go to the fund manager. The price of a fund manager will vary from customer to customer based on his investment. It can be 2-3% of the profit money brought by investors, and it is called a fund’s “Net Asset Value.”
The main advantage of mutual funds is an investor with a small amount of money can invest in a group. It can cut a diversified portfolio where an investor with less amount cannot invest in the company. The investors enjoy shares and profits (even losses).
1. What is a good Upside/Downside Capture Ratio?
When fund returns are greater than the benchmark value in the period of positive returns, then it is said that a good upside capture ratio. When fund returns prevent losses during a bust, then it is said to have less downside capture ratio, which is good.
2. What does a negative downside capture ratio mean?
When a fund makes a positive return during a bust (when benchmark declines), then it is said to move in the opposite direction of the benchmark and is negative.
3. What is market capture?
The market capture ratio is a measure of the overall performance of an investment manager in the market. It is calculated by dividing the manager’s returns by the index returns. It is represented in percentage.
4. What does Sharpe Ratio mean?
Sharpe Ratio measures the risk-adjusted return of a financial portfolio. Higher the Sharpe Ratio, the better the fund’s return relative to the risk it has taken. And sometimes, when the work is poor or underperformed, Sharpe Ratio will be negative.
5. What is a good alpha score for a fund?
A positive alpha score for a fund means it has performed well to beat the benchmark value. Similarly, a negative alpha score means it has performed poorly or underperformance by the alpha value.
6. Difference between the Sharpe ratio and Alpha score?
Sharpe ratio describes the risk taken to perform well to score a positive alpha value (generally 1.0). In contrast, the alpha score describes how much percentage a fund has beaten or loosen the benchmark value.
Tip For Investors
- Always use the right Capture Ratio that matches your investment duration. If your investment plan is for 5 years, then using a 3-year capture ratio is irrelevant.
- The benchmark that you use has to match with the fund category. For example, you cannot use Sensex to compare Debt Fund. Make a proper goal.