Market Capture Ratio

Market rallies and crashes are both realities of equity investing. A mutual fund scheme which outperforms both in up markets and down markets is likely to give superior risk adjusted returns and outperform other funds in the long term. Performance in different market conditions is measured by a set of metrics called market capture ratios. In this tool we see the performance of a fund both in up-market (months in which the benchmark index was up) and down market (months in which benchmark index was down). The ratio of the average monthly returns of a scheme versus average monthly returns of the benchmark when the market was up is known as Up-market Capture Ratio. The ratio of the average monthly returns of a scheme versus average monthly returns of the benchmark when the market was down is known as Down-market Capture Ratio.

High Up Market Capture Ratio (more than 100%) is good, because it means the fund manager is able to generate higher than market benchmark returns when market is rising. Low Down Market Capture Ratio (less than 100%) is good, because it means the fund manager is able to provide some downside risk protection when market is falling. Negative Down Market Ratio is very good because it means that even in periods when the market fell, the fund on an average gave positive returns, which is always good for investors.

Capture Ratio is the ratio of Up Market Capture Ratio and Down Market Capture Ratio. High Capture Ratio (more than 1) is good because it implies good risk adjusted returns. Negative Capture Ratio is also good, provided the negative is on account of Down Market Capture Ratio.