Personal Finance News
5 min read | Updated on May 31, 2024, 20:03 IST
SUMMARY
Capture ratios provide an important measure of mutual fund performance and show how the funds perform in both bull and bear markets. These ratios condense tough data into a manageable evaluation of the quality of fund management.
Underrated Measure of the Mutual Fund Industry: Market Capture Ratio
There are numerous methods of measuring mutual fund performance in the stock market. Chief among these are the capture ratios which communicate messy information in an easily understandable and actionable manner. I first encountered these in college and the meaning was better illustrated to me using the following.
In my first year of medical school, I was part of a close group of 8-10 friends. We spent our days exploring the city, skipping lectures, and spending hours at our favourite coffee shop. Despite the impending exams, we rarely hit the books, managing to get by with just enough to pass. However, one friend stood out. He joined us in all our adventures but always found time to study before exams. Consequently, he consistently scored higher than the rest of us, not by a massive margin, but enough to be noticeable.
Our friend is the same as a mutual fund that is well-managed, whereas the others including us are like a benchmark. In times of celebration, our friend, who is compared to a well-managed mutual fund, managed to keep pace with us. However, when the times were tough due to the economic recession, he performed better than us because of his diligence in risk management.
Capture ratios quantify this behaviour. They measure how much of the benchmark's returns a fund captures during positive and negative market phases.
**Example:**ABC BlueChip Fund
Consider the ABC BlueChip Fund, Regular, Growth fund over 3 years:
Upside Capture Ratio: 108, meaning the fund captured 108% of the benchmark's gains.
Downside Capture Ratio: 80, meaning the fund captured 80% of the benchmark's losses.
The ideal mutual fund would have:
In reality, mutual funds typically excel in one aspect but not both. For example:
Scheme Name | Benchmark Name | Launch Date | Scheme Return (%) | Up Market Capture Ratio (%) | Down Market Capture Ratio (%) | Capture Ratio |
---|---|---|---|---|---|---|
ABC BlueChip | NIFTY 50 TRI | 05-05-2008 | 36.12 | 140 | 63 | 2.21 |
XYZ Large cap | NIFTY 50 TRI | 31-08-1994 | 23.74 | 98 | 96 | 1.02 |
Scheme Name | Benchmark Name | Launch Date | Scheme Return (%) | Up Market Capture Ratio (%) | Down Market Capture Ratio (%) | Capture Ratio |
---|---|---|---|---|---|---|
ABC BlueChip | NIFTY 50 TRI | 05-05-2008 | 19.96 | 108 | 80 | 1.36 |
XYZ Large Cap | NIFTY 50 TRI | 31-08-1994 | 14.04 | 99 | 107 | 0.93 |
Scheme Name | Benchmark Name | Launch Date | Scheme Return (%) | Up Market Capture Ratio (%) | Down Market Capture Ratio (%) | Capture Ratio |
---|---|---|---|---|---|---|
ABC BlueChip | NIFTY 50 TRI | 05-05-2008 | 17.68 | 101 | 88 | 1.15 |
XYZ Large Cap | NIFTY 50 TRI | 31-08-1994 | 14.89 | 94 | 91 | 1.03 |
Scheme Name | Benchmark Name | Launch Date | Scheme Return (%) | Up Market Capture Ratio (%) | Down Market Capture Ratio (%) | Capture Ratio |
---|---|---|---|---|---|---|
ABC BlueChip | NIFTY 50 TRI | 05-05-2008 | 15.17 | 99 | 87 | 1.13 |
XYZ Large Cap | NIFTY 50 TRI | 31-08-1994 | 12.93 | 94 | 95 | 0.99 |
When evaluating mutual funds, consistency in capture ratios across different time frames (3, 5, 10 years) is crucial. A fund that consistently manages risk well, like ABC BlueChip with consistent downside capture ratios over the years, is often more reliable.
Capture ratios provide a straightforward way to assess mutual fund performance by focusing on how well a fund navigates market ups and downs relative to its benchmark. While an ideal balance between upside and downside capture is rare, understanding these metrics helps investors choose funds that align with their risk tolerance and investment goals.
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