It is essential to look at the performance of Unit Linked Insurance Plan, especially for equities during market downturn. In addition, it is vital to check whether the fund is able to protect downside risk.
During the peak of a bull market, there are funds that would look good in terms of performance, but they might not necessarily look good if we go to look at their performance in a bear market. When the market fluctuations take place you can choose debt funds to protect your investments and later switch to equity once the market regains its momentum. So accordingly choose your preferred ULIP and invest in the same.
You can use the downside capture ratio and the upside capture ratio to gauge a fund’s performance during bullish and bearish market conditions. To know what they are, keep reading.
- What is the downside capture ratio?
The downside capture ratio measures the performance of a ULIP fund and how they’ve done in the market down-periods. Followed by that, it defines down periods as the months where the benchmark index gives a negative return. The downside capture ratio then measures how much of the index downside the fund has captured in those down market months cumulatively.
For instance, If the downside capture ratio of a fund is 70, it will mean that the fund has captured 70 per cent of the downside of the index. It also indicates that it has fallen less than the benchmark index as well as protected downside risk. We also can compare it with the peer category average, for getting a better picture.
- What is the upside capture ratio?
To analyse the working of ULIP funds in rising markets you should have a look at upside capture ratio. The upside capture ratio defines up-periods as months in which the benchmark index gives positive returns. The upside capture ratio then measures how much of the index upside has the fund captured in those up-market months cumulatively.
For instance, if the upside capture ratio of a fund is 115, it will mean that the fund captured 115 per cent of the upside of the index, which indicates that it has outperformed the benchmark index, in up-markets.
- What is the overall capture ratio?
The overall capture ratio is an upside capture ratio that is divided by the downside capture ratio. Overall capture ratio greater than 1 and indicates that the fund’s upside capture is greater than downside capture. This means that on an overall net off basis, it has done well. However, it is more important to manage downside risk.
Maximum Drawdown- Another measure of downside risk
For measuring the fund performance during market downturn we have a metric that’s called Maximum Drawdown, which is the maximum fall in the fund’s NAV during any market downturn from the market peak till the valley date, this is when the market starts to turnaround. The maximum drawdown of a fund is available over various periods.
Conclusion
In conclusion, lower the downside capture ratio, the better and higher the upside capture ratio, the better. You must typically look at ULIP funds that have reasonably good upside capture ratio and a lower downside capture ratio for providing optimal returns over the long term as well as a relatively more comfortable experience to the investor. To gain maximum ULIP benefits, know how to select the best ULIP plan in India.
