Mutual Fund Unlocked: Understanding the Ratios of Mutual Funds

After understanding the NAV and mutual fund costs, let’s look into the important ratios which provide a better understanding of a mutual fund's performance.

Up-Down Market Capture Ratio

Basically Up-Down market capture ratio are used to evaluate the investment managers performance in a volatile market. That is the ratio assesses the performance of the investment manager relative to an index during the period when the Index has risen or fallen. The ratio is calculated by dividing monthly return of the fund (during the index’s positive or negative return) by the Index return in the same period.

So, the formula for the Up-Down market capture ratio is

                                        Up/Down market capture ratio= Funds Returns (Monthly)/Index returns *100

A manager or fund whose up-market capture ratio is higher than 100 shows that during the positive movement of Index the fund/manager has outperformed. For example, Up market capture ratio of 110 of a manager suggests that the manager has outperformed the index by 10% during that period. Similarly, downside capture ratio less than 100 shows that a fund has fallen less than its index downtrend. Ideally, the investors are advised to invest in the funds whose Up-market capture ratio is more and down-market capture ratio is low relatively.

Portfolio Turnover Ratio

Portfolio turnover ratio is used to determine fund’s trading activity which is calculated by dividing the purchases or sales (whichever is less) by average net assets. That is, it considers the total amount of securities purchased or sold during the specific period and NAV of the fund in that period.

So, the formula for Portfolio turnover ratio is

                                          Portfolio turnover ratio= Purchases or sales (whichever is less)/ NAV*100

For instance, if a fund has bought securities of Rs. 150 crore and sold the securities worth Rs. 100 crore and its Net Asset value (NAV) is Rs. 100 crore then the portfolio turnover rate will be 100 per cent.

Usually, aggressively managed funds have higher portfolio turnover ratio. However, conservative funds have lower portfolio turnover ratios than that of aggressively managed funds. The portfolio turnover ratio between 25 to 40 per cent suggest the Buy-Hold strategy.

To unlock more insights regarding mutual fund and its analysis, Stay Tuned to Mutual Funds Unlocked.

Mutual Fund Unlocked: Basics of Mutual Funds (Part I)

Mutual Fund Unlocked: Basics of Mutual Funds (Part II)

Mutual Fund Unlocked: NAV and Mutual Fund Costs