Correlation between Mutual Fund Returns & Capture Ratios

Published: April 26, 2016 at 7:39 am

Last Updated on

The correlation between mutual fund returns and the upside/downside capture ratios is discussed using Mid-cap mutual funds. It is no secret that I am a fan of the downside capture as a simple means of measuring downside protection, selecting and reviewing mutual funds.

In this  post, the recently obtained downside Capture Ratio of all Mid-cap Equity Mutual Funds is  used for analysis.

Downside capture refers to the amount of benchmark losses captured by the fund. That is, a fund which has only captured 70% of benchmark losses is considered better than a fund which has captured 80% of losses. This ratio (expressed as a percentage) is known as downside capture. Lower the downside capture the better.

Upside capture refers to the amount of benchmark gains captured by the fund. That is, a fund which has captured 110% of benchmark gains is considered better than a fund which has captured 90% of gains. This ratio (expressed as a percentage) is known as upside capture. Higher the upside capture the better.

Capture ratio = upside capture/downside capture. A value greater than 1 is considered ‘good’ as it implies high upside and low downside.

The reason I like the downside capture or its brother the upside capture  is because they are simple to understand and do not have the limitations associated with other popular risk-adjuted metrics like alpha, Sharpe ratio, Sortino ratio, standard deviation etc.

More about the downside capture and  upside capture can be found in the following posts:

Nine year Returns 

downside-vs-return- A9

Hate ads but would like to support the site? Subscribe to our ad-free newsletter and get beautifully formatted full articles delivered to your inbox!

Unfortunately, the analyzer could only calculate for a handful of funds over this duration. Although there is a general sloping trend from left to right, there is also a considerable spread in returns for a given downside capture or vice versa.

Higher the capture ratio, higher the return is the ‘general trend’ with the spread as mentioned above. Notice that one fund is an outlier. This has an unusually low upside capture which makes the capture ratio small.Will have to investigate further into this.

It is important to note that each capture ratio is calculated with reference to a different benchmark (that of the funds). I believe this is the main reason for the scatter.

Eight-year returns

downside-vs-return- A8Sometimes, when the benchmark has moved down, the fund may move up. The  downside capture would then become negative (as it is a ratio). This is quite normal and a ‘good thing’.

The spread in downside is much higher compared to the capture ratio. Aside from the presence of outliers, the capture ratio does have better correlation with returns than just the downside capture.

Data for other durations can be found in this slideshow. Data over short durations is included only for completeness. Not much can be made out of these.

 Impression: More data points across categories is necessary before ‘concluding’ anything. With what we have now,
1) The capture ratio correlates better with returns than just the downside protection.
A fund  with low downside capture (lower losses than benchmark) and high upside capture (higher gains than benchmark) can be expected to provide ‘good’ returns. The capture ratio (=upside/downside) seems to reasonably bring out this information.
2) However, low capture ratios  with high returns show up as outliers.
3) Low downside capture does not guarantee returns.
4) As always maintained, it is better to shortlist ‘good performers’ as defined by above category average performance or top 10 over multiple durations first and then look for consistent downside protection in the shortlist.
5) Above average capture ratios, and above average returns is another way to screen.
Mutual-fund-screener-4
Analyze individual funds with the Mutual Fund Downside Protection Calculator.
Do share if you found this useful
Hate ads but would like to support the site? Subscribe to our ad-free newsletter and get beautifully formatted full articles delivered to your inbox!

About the Author

M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Linkedin
Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. For speaking engagements write to pattu [at] freefincal [dot] com

About freefincal & Content Policy

Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site.
Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)

Connect with us on social media

Our Publications


You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingMy first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.  It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantGamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)  

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

Comment Policy

Your thoughts are the driving force behind our work. We welcome criticism and differing opinions.Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

1 Comment

Leave a Reply

Your email address will not be published. Required fields are marked *