Why some funds market capture ratio looks better than funds giving higher return

Let us explain the calculation methodology of these two ratios, so that we can help you understand better how to interpret and use these ratios. Firstly, we calculate the monthly returns of the scheme and its benchmark over the period. Next, we look at all the months when the market is up. For each “up” month we calculate the ratio of monthly return of the scheme and the benchmark. The average ratio of the monthly return of the scheme and benchmark for all up months in the Up Market Capture Ratio. Similarly, we look at all the months when the market is down. For each “down” month we calculate the ratio of monthly return of the scheme and the benchmark. The average ratio of the monthly return of the scheme and benchmark for all down months in the Down Market Capture Ratio. What does these two ratios tell us? High Up Market Capture Ratio tells us that, the fund manager was able to capture the market upside and deliver superior returns than the benchmark in rising markets. Low Down Market Capture tells us that, the fund manager was able to protect / limit downside risk in falling markets.

While the two Market Capture ratios have a big impact on the returns, the actual returns of the scheme will depend on the how many “up” and “down” periods we had during the tenure in question. If we had many more “up” periods than down periods, then “Up Market Capture Ratio” will be more important. As the number of “down” periods go up, the “Down Market Capture Ratio” becomes more important. Actual returns, also depends on how much the market moved up in the up periods, versus how much the market moved down in the down periods. Finally, it also depends how the benchmark performed in the “up” and “down” periods. You can see that all the 4 funds in your selections have different benchmarks (chosen by their fund managers). Let us compare the three midcap oriented funds in your selection (DSP BlackRock Micro Cap Fund is a small cap oriented), Sundaram Select Midcap, Canara Robeco Emerging Equities and Kotak Emerging Equities. All three funds have good market capture ratios. The 5 year annualized returns of these funds range from 19 to 22%; there is not a huge difference in returns. In the last 5 years, we had many more “up” market periods for midcap market segment, compared to the “down” market periods. Even in the “down” periods the decline was relatively moderate compared to the rally in the “up” periods. Hence, Up Market Capture Ratio was more important during that particular tenure for this market segment and hence Canara Robeco Emerging Equities gave the highest returns among these three funds.

Capital Appreciation is the most important priority of all equity investors. But in addition to capital appreciation, different investors have different investment needs, based on their risk appetite and temperament. Some investors want downside protection in falling markets, while others with more appetite for risk are comfortable with falling market but want maximum capture of market momentum in rising markets. The two capture ratios can help both sets of investors select schemes that match the investment needs and risk appetites.