Understanding Upside and Downside Capture ratios

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Upside and Downside capture ratios are two easy-to-understand measures used to analyze performance of a volatile instrument.

I had earlier written a post on how to use them for mutual fund analysis. Suggest you it along with this post:

Simplify Mutual Fund Analysis with Upside/Downside Capture Ratios

The explanation provided there is quite oversimplified. In this post, I explain how they are calculated and interpreted.

I am developing an upside downside capture calculator based on monthly returns. This is much more intuitive than the way in which the mutual fund risk-return analyzer handles them.

What is upside capture ratio?

Suppose we have a set of month returns for say, 5 years.

1) We calculate the net CAGR of the fund with only those months when the benchmark returns are greater than or equal to zero. This is the Upside CAGR of the fund

2) Similarly, we calculate net CAGR of the benchmark with only those months when the benchmark returns are greater than or equal to zero. This is the Upside CAGR of the benchmark.

Upside capture ratio = Upside CAGR of fund/Upside CAGR of benchmark

For example, if upside cagr of the benchmark is 35% and upside cagr of the fund is 34%, the fund has captured 97% of the benchmark returns when it was positive.

Upside capture ratio can also be more than 100% – meaning the fund has outperformed the benchmark when the going was good (benchmark returns were positive)

What is downside capture ratio?

Suppose we have a set of month returns for say, 5 years.

1) We calculate the net CAGR of the fund with only those months when the benchmark returns are lesser than  zero. This is the Downside CAGR of the fund

2) Similarly, we calculate net CAGR of the benchmark with only those months when the benchmark returns are lesser than zero. This is the Downside CAGR of the benchmark.

Downside capture ratio = Downside CAGR of fund/Downside CAGR of benchmark

For example, if downside cagr of the benchmark is -15% and downside cagr of the fund is-10%, the fund has captured only 66% of the benchmark losses.

Lower the downside capture ratio, the better downside protection.

Downside capture ratio with be positive only if both downside cagr of fund and benchmark are negative.

If the downside cagr of benchmark is negative while downside cagr of fund is positive, the downside capture ratio will be negative, This is a pretty good thing! It will only be observed over short durations.

What is capture ratio?

Capture ratio = upside capture ratio/downside capture ratio.

Higher the better (unless downside capture ratio is negative)

Here are some examples.

HDFC Top 200


Notice that HDFC top 200 has consistently  high upside capture and reasonably low downside capture.

The upside capture is never above 100%. Meaning it did not beat the index if we consider only the good times. How did it generate alpha?

With low downside capture. It did not fall as much as the index during bad times resulting in alpha.

Notice the negative downside capture for 1 year investment period.

Moral of the story: Look for consistent downside protection!

Quantum Long Term Equity


Much is made of QLTE’s cash strategy. It does not reflect here! Its upside and downside captures are more or less similar to Top 200’s.

Moral of the story: Quality of the 65% equity is more important than the 35% cash.

For more details on where to get this ratios online see

Simplify Mutual Fund Analysis with Upside/Downside Capture Ratios

To be continued …..

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, 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. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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  1. Very informative and clearly explained. Thanks. I guess there is a small error in explanation of Downside ratio, the values are interchanged.

  2. Dear Pattu Sir,

    1) When I checked Morningstar today morning, DSP Blackrock Micro Cap fund’s downward capture ratio is -8.61% vs category’s ratio of 84.97%. From your above article, If I am right, this fund looks good for SIP. I am little confused on this fund’s negative ratio vs benchmark’s positive ratio (what it means). Can you please explain on this?.

    2) Where to get the downside / upside capture ratio of individual funds of given category (largecap, muticap, etc.,) in one shot instead of going thru fund by fund in morningstar.


    J Ayyappan

  3. But as checked in the Morningstar site, Downside capture ration of HDFC Top 200 is more than 100% for 3 , 5, 10 Y period on present date.

  4. Dear Pattu sir,

    Thanks for the post. Helpful to understand the concept.

    Quick clarification “However, downside capture ratio can also be negative if downside cagr of fund is negative while downside cagr of benchmark is positive! This means something is wrong with the fund! This is pretty rare.”

    How can downside cagr of the benchmark be positive given we pick only the months when benchmark was down?

    Thanks for taking time to educate others.


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