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Many MFDs simply look at fund manager performance based on the underlying benchmark to evaluate performance of a fund.
However, MFDs should look at how the fund manager has performed both in an uptrend and a downtrend market to evaluate the performance.
Let us look at these two ratios to know more:
Up capture ratio
The up capture ratio indicates how the fund performed during an uptrend market or in a bull market. If the fund’s up capture ratio is 130%, the mutual fund scheme has captured 30% extra return than its benchmark during the bull run.
On the other hand, if this ratio is 90% then the mutual fund scheme has underperformed and captured 10% less than the index.
The up-capture ratio = (Market Return / Index Return) *100
Let’s understand this through an example;
In the above example, the CAGR for the mutual fund scheme is 28.54% and the benchmark CAGR is 27.6%.
Up capture ratio = (Market Return/ Index Return) = (28.54%)/ (27.6%) = 103.4%
This means that the scheme outperformed by 3%.
Down capture ratio
On the other hand, if the down capture ratio is 90% then the fund manager captured only 90% of the fall in the bear market and he outperformed the index.
Further, if this ratio is 110% that means the fund manager has captured 110% of the fall in the bear market and failed to beat the index.
Here is an example for down-turn ratio;
Down capture ratio = Market ROI /Index ROI = -.5.89%/-7.30% = 80.7%.
The 80.7% down capture ratio means that the fund manager has captured only 80% of the fall in the bear market and outperformed the bear market.
Overall market capture
The overall market capture of the scheme can be calculated by the (Uptrend capture/down trend capture) *100.
Overall capture = 103.4%/80.7% = 128%.
The 128% of the overall capture means that the fund manager has outperformed the underlying benchmark in both upturn and down turn market conditions.
Suda Bhanu Prasad of Paisa Health is from Kakinada, Andhra Pradesh. He is a SEBI Registered Investment Adviser. You can visit his website at https://paisahealth.in/blog/ to know more.
The views expressed in this article are those of the author and do not reflect the views of Cafemutual.
