What are Mutual Fund Upside / Downside Capture Ratios? | How to use them in MF Performance Analysis?

‘The Stock market index (Sensex/Nifty) has been performing well, but, my Mutual Fund has relatively not been performing well.’

‘The market has been stable, but, my fund is in deep red.’

We often hear these sentences from mutual fund or equity investors. The ideal scenario where-in every an investor would like to be in is : to have a mutual fund that cut back on losses during a DOWN market and generate superior positive returns in UP market.

For example – if the benchmark index has given 8% returns (representing the market movement), you expect your fund to return >8% in the UP market. If the index has given -10% returns, you expect your fund to give lesser negative returns than that, say -8%.

So, all of us wish to have a mutual fund in our portfolio that beats the Index whenever it (benchmark index) moves UP and falls lower than the Index whenever it moves DOWN.

A metric like Mutual Fund Upside / Downside Capture Ratios will help us in analyzing the performance of Mutual Fund schemes relative to their Benchmark indices.

In this post, let us understand – What are Mutual Fund Upside/Downside Capture Ratios? How to use Capture ratios in identifying & comparing best mutual fund schemes? How to identify mutual funds with best downside protection capture ratios?….

What are Mutual Fund Upside/Downside Capture Ratios?

Capture ratio basically indicates the intrinsic strength of a mutual fund to face the market turbulence. It decomposes the annualized returns to show under-performance and out-performance with reference to a benchmark such as Sensex, Nifty or any other similar indices.

What is Upside Capture Ratio in Mutual Funds?

An upside capture ratio shows you whether a given mutual fund scheme has OUTPERFORMED a broad market benchmark during periods of market strength (uptrend).

Upside capture ratios for funds are calculated by taking the fund’s monthly return during months when the benchmark had a positive return and dividing it by the benchmark return during that same month.

What is Downside Capture Ratio in Mutual Funds?

A downside capture ratio shows you whether a given mutual fund scheme has lost less than the broad market benchmark during periods of market weakness (downtrend).

Downside capture ratios are calculated by taking the fund’s monthly return during the periods of negative benchmark performance and dividing it by the benchmark return.

How to use Upside & Downside Capture Ratios in identifying Best Mutual Fund Schemes?

We are now clear that an investor should look at both Returns and measures of volatility like Capture ratios, while analyzing the overall performance of mutual fund schemes.

So, what are the ideal capture ratios?

  • An upside capture ratio over 100 indicates a fund has generally outperformed the benchmark during periods of positive returns for the benchmark.
  • A downside capture ratio of less than 100 indicates that a fund has lost less than its benchmark in periods when the benchmark has been in the red.
  • Ideally, you would like a fund to have higher Upside capture ratio (>100) and lower downside capture ratio (<100). Lower the downside capture ratio, better the ‘DOWN-SIDE PROTECTION’.
  • Some funds may give you the best returns when markets areUPbut they do not necessarily go on to out-perform when the marketsFALL. So, we need to identify the funds which outperform in both the scenarios, which is a tough task!. Hence, identifying the funds that ‘lost the least when markets tanked’ can be given more importance.
  • Capture ratio is calculated as Upside Ratio divided by Downside ratio. For example, a fund with an upside-capture ratio of 100% and a downside ratio of 80% would have an upside/downside ratio of 1.25. Any ratio above 1 means that a fund does a good job of capturing gains during bull phases while lessening the impact of bear markets.
  • Advisable to use Capture ratio data points of longer periods so that a fund’s performance across different market cycles gets captured.

Mutual Fund Capture Ratios – Illustration

Let us now take couple of equity mutual fund schemes and look at their past performance in terms of Capture ratios.

I am considering multi-cap oriented funds – HDFC Equity Fund and Aditya Birla Sun Life Equity Fund.

HDFC Equity Fund Birla Equity Fund past performances returns
HDFC Equity Fund & Birla Equity Fund

If you notice,both these funds have given around 12% returns in the last 10 years. So, which one will you pick for investment? Its tough to decide, am I right?

Let’s collect some more data regarding the funds’ performance vis-a-vis their benchmark indices.

HDFC Equity Fund Vs BSE 500 (benchmark index)

HDFC Equity Fund vs benchmark S&P BSE 500 Vs Multicap Fund category performance data pic
HDFC Equity Fund Vs Benchmark Index BSE 500

In the 10 year period, the fund has outperformed its benchmark index and also its category.

Aditya Birla Equity Fund Vs BSE 200

Aditya Birla Equity Fund vs benchmark S&P BSE 200 Vs Multicap Fund category performance data
Birla Equity Fund Vs BSE 200

During the last 10 years, this fund has also out-performed its benchmark index and category returns.

In such a scenario, would you pick HDFC Equity Fund or Birla Equity Fund?

This is where, the capture ratio, when used together with other risk measures, could be an important tool for monitoring a fund’s overall performance for the investors.

Where can we find Mutual Fund Upside / Downside Capture ratios data? – We can get this information from Morningstar portal.

Visit Morningstar.in -> ‘search’ for respective Mutual Fund -> click on ‘Risk & Rating’ tab -> go to ‘Market volatility measures’ section.

Capture Ratios data : 5 Year Time Horizon

Below are the upside capture and downside capture details for both the funds over a 5 year time-period;

HDFC Equity Fund : 5 year performance

HDFC Equity Mutual Fund Upside Downside Capture Ratios 5 year time horizon
HDFC Equity Fund | Upside & Downside Capture Ratios (source : morningstar.in)
  • As discussed, you would like a fund to have higher Upside capture ratio (>100) and lower downside capture ratio (<100). Lower the downside capture ratio, better the ‘DOWN-SIDE PROTECTION’.
  • HDFC Equity fund has an Upside capture ratio of 108% which is more than 100%, it is a good sign!
  • However, the fund has a downside protection capture ratio of 113%, which is a bad sign!

Aditya Birla Equity Fund : 5 year performance

Aditya Birla Sun Life Equity Mutual Fund Upside Downside Capture Ratios 5 year time horizon
Birla Equity Fund | Capture Ratios data | 5 year time-horizon
  • Birla Equity fund has an Upside capture ratio of 100%, which is a good sign! Note that the fund has not out-performed its index, but has captured the entire positive trend same as its index.
  • The fund has a downside protection ratio of 91% (less than 100%) which is a good indicator.

Mutual Fund Capture Ratios data : 10 Year Time Horizon

Let’s check the capture ratios over a 10 year time horizon;

HDFC Equity Fund : 10 year performance

HDFC Equity Mutual Fund Upside capture Downside protection Ratios 10 year time horizon
HDFC Equity Fund | Capture Ratios data | 10 year time-horizon
  • The Upward capture ratio of HDFC Fund is 110% – is more than 100% – Good Sign.
  • Downward Capture ratio is 103%, a bad sign!

Aditya Birla Equity Fund : 10 year performance

Aditya Birla Sun Life Equity Mutual Fund upward Downside Capture Ratios 10 year time horizon
Aditya Equity Fund | Upward & Downward Capture Ratios data | 10 year time-horizon
  • Birla Equity fund’s Upward capture ratio is 102% – is more than 100% – Good Sign.
  • Downward Capture ratio is 93%, a good sign!

Though both the funds have generated almost similar returns in the last 10 year period, the efficiency of their performances across market cycles is not the same.

So what do we infer? – In terms of performances during bull phases (uptrend), HDFC Equity fund has fared well. But, during the bear phases of markets (downtrend), Aditya Birla Equity fund has performed better.

Given a choice, I would pick Birla Equity Fund, given its above average performance during bull phase and good performance in bear phase.

Conclusion : It is very tough to find a fund which has both good upside capture ratio and a good downside capture ratio. So, a fund showingless than 100% downside capture ratio can be preferred to a fund showing more than 100% upside capture ratio.

I hope you find this post useful and informative. Do share your comments!

Continue reading :

  1. How to select the right and best Mutual Fund Scheme based on the Measures of Volatility?
  2. When should you sell your Mutual Fund Schemes? | When to exit a Mutual Fund?
  3. My Latest Mutual Fund Portfolio | My Equity MF Picks
  4. Top 15 Best Mutual Funds 2021 & beyond | Top Performing Equity Funds

(References : freefincal.com, valueresearchonline.com & morningstar.in)

(Mutual Funds are subject to market risks and past performance may or may not be repeated) (Image courtesy of Greenleaf Designs at FreeDigitalPhotos.net) (Post published on : 06-August-2019)

  • Ajay says:

    Very Informative Article. Thanks a lot Sreekanth.

  • Ravi Dutt says:

    Mr Sreekanth, I am interested in investing in Mutual Funds. It is understood that Rolling Returns are also a better indicator of their performance. If you find this topic suitable, then some information on the best funds based on such criteria could be given for each of Large, Mid, Small, Multicaps, in a series of articles. This info can do investors a lot of good

  • Gourav says:

    Hello Srini,
    I have gone through your last topic where you mentioned you have modified your profile.
    As i have followed your suggestions and reading your topics, Based on that i have below profile but as you have changed your profile.
    Could you please review and suggest, Even though i have started from around 4 years. Should i wait for atleast 6 years to review.
    Have long horizon (7+years),
    1. UTI Mid Cap Fund – Direct Plan (G) – Rs 2000 (3 years)
    2. ICICI Prudential Value Discovery Fund – Direct Plan (G) – Rs 3000 (4 years)
    3. ICICI Prudential Large & Mid Cap Fund – Direct Plan (G) -Rs 3000 (2 Years)
    4. HDFC Hybrid Equity Fund – Direct Plan (G) – Rs 3000 (2 years)
    5. HDFC Mid-Cap Opportunities Fund – Direct Plan (G) – Rs 5000 (3 years)

    • Sreekanth Reddy says:

      Dear Gourav,
      Review has to happen periodically. But, whether you change your MF portfolio or not, it depends on your risk profile, investment goals, investment horizon and prevailing market conditions.

      4 & 5 are fine.
      As of now, continue with 2.

      Have a re-look at 1 & 2. You have HDFC mid-cap, so one more mid-cap (UTI) may not be really needed in the portfolio.

      Instead of large+mid-cap, you may include a large-cap index fund. Ex : UTI Nifty.

      • Gourav says:

        Thank you very much Srini for help, i will consider your suggestion and change after this market correction. Hope that will be better to add more with low price. Once market have some correction will change to suggested funds Or is this right time to switch.

        • Sreekanth Reddy says:

          Dear Gourav,
          No one can exactly predict when the market correction may get over. So, you may buy units in a staggered manner.

  • Taarun says:

    Excellent Blog. Very informative to take right decision

  • Ravi Dutt says:

    Hearing about this Capture Ratio for the first time, as the Indian sites don’t mention it.
    For investing in MFs, I compare the five star funds of each category as given by Valueresearchonline etc. Don’t know whether they take Capture Ratio into consideration while rating Funds

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