How Mutual Fund Upside and Downside Capture Ratios are calculated

Published: February 19, 2016 at 7:25 am

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Upside and Downside capture ratios are easy-to-understand mutual fund performance measures. Consistent downside capture ratios can be combined with consistent returns (try the mutual fund screener) to select and review mutual funds.

Regular reader may be aware that I am a fan of the downside capture ratio. In this post, I present a video that describes how these ratios are calculated with an example.

What is upside capture ratio?

Over a given period, a benchmark (index) could have given a set of positive or negative monthly returns.

Whenever the index gave a positive return, how did a fund fare? How much of those positive index returns did the fund ‘capture’?

The upside capture measures this. Obviously, higher the upside capture, the better.

What is downside capture ratio?

Whenever the index gave a negative return, how did a fund fare? How much of those negative index returns did the fund ‘capture’?

The downside capture measures this. Obviously, lower  the downside capture, the better.

Sometimes the downside capture can be negative. Typically this means, that the fund gave a positive return, while the index gave a negative return!

Check out this video for an example- Mutual Fund Performance Review: IDFC Premier Equity

I had previously written by why I believe these ratios are superior to other metrics: Simplify Mutual Fund Analysis with Upside/Downside Capture Ratios

Where can I get these ratios?

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At Morning Star India. See above link for an example. Please note the benchmark used for calculation before interpreting numbers. Balanced funds may give weird results.

How Upside and Downside Capture Ratios are calculated (4:30 minutes)

A more detailed explanation can be found here: Understanding Upside and Downside Capture ratios

Example:

upside-capture-downside-capture

Over the last year, HDFC Top 200 has only captured 47% of BSE 100’s (its benchmark is BSE 200) positive returns and 98* of its negative returns.

Three and five-year numbers are pretty bad as the fund has captured 108% and 104% of BSE 100’s losses respectively. Hard for anyone to justify that performance!

DIY analysis: Mutual Fund Downside Protection Calculator

Check out other videos from the freefincal youtube channel

 

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Pattabiraman editor freefincalM. 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 Twitter or 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.
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6 Comments

  1. At the outset thanks for the great education as always.

    Just one thing, I was trying to replicate your calculations on my excel sheet and find in the downside capture ratio, the CAGR of the fund is +1.22% & not -1.22% as mentioned by you. Could you please re-check, and also let me know if this be the case, would it imply that the down side capture ratio is 0% or what???

    1. Nice catch! It is +1.22%. The downside capture is a ratio so it cannot be zero: +1.22/(-8.94%) will be negative. Which is a good thing! This is mentioned in the post, but I did not realized this mistake. Thanks.

  2. sir,
    to confirm my understanding,
    for ‘very good mf’ to ‘very bad mf’
    up ratio can be
    150, 125, 105, 100, 95, 40, 10, 0, -10, -40, -100, -108 and so on
    and
    (minus up ratio means fund gave -ive return even when index gave positive)
    down ratio can be
    -120, -100, -40, -10, 0, 10, 40, 95, 100, 105, 125, 150 and so on
    (-ive down ratio means fund gave positive return even when index was negative)
    numbers are theoreticle, just for clarity.
    but what can be the range of these figurs possible as per your feeling or observation
    and , is it that benchmark up and down ratio is always 100
    regards
    u r too good at analysis
    baljit

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