Drawdowns Explained
What is it?
A drawdown measures the decline from a fund's or portfolio's highest recorded value (its "peak") to its lowest point afterward (its "trough"), expressed as a percentage, before it recovers to a new high. The maximum drawdown is the single largest such peak-to-trough decline over a given period — a common way to measure how bad the worst historical period actually was.
Why should you care?
Maximum drawdown gives a concrete, historical answer to "how bad could this get?" — a more tangible risk measure for many investors than statistical volatility, because it shows the actual worst real-world experience a fund's investors have lived through, which is directly relevant to whether you could tolerate holding it.
Real-life example
A hypothetical equity fund might have grown from ₹100 to ₹150 (its peak), then fallen to ₹100 during a downturn (its trough), before eventually recovering and surpassing ₹150 again. That fund's maximum drawdown for this period would be 33% (a fall from 150 to 100). Two funds with similar long-term average returns can have very different maximum drawdowns — the one with a smaller maximum drawdown offered a smoother, less stressful ride to the same eventual destination.
Common mistakes
- Only looking at a fund's average or CAGR return without checking its maximum drawdown, which hides how painful the worst period actually was.
- Assuming a fund's future maximum drawdown will never exceed its historical one — past drawdowns are a guide, not a guaranteed ceiling.
- Panicking during an in-progress drawdown as though it will necessarily become the fund's worst-ever drawdown, when many drawdowns recover well before reaching historical extremes.
How maximum drawdown is calculated (illustrative)
| Point | NAV | Description |
|---|---|---|
| Peak | ₹150 | Highest value reached before the decline |
| Trough | ₹100 | Lowest value reached during the decline |
| Maximum drawdown | 33% | (150 − 100) ÷ 150 × 100 |
FAQ
Is a smaller maximum drawdown always better?
All else equal, a smaller maximum drawdown for a similar long-term return is preferable since it means a smoother experience — but funds with higher return potential (like small-cap equity) often naturally carry larger typical drawdowns, so the right comparison is within similar fund categories.
How is drawdown different from volatility?
Volatility measures the size of swings generally (up and down); drawdown specifically measures the worst single peak-to-trough decline. A fund could have moderate overall volatility but still experience one unusually deep drawdown during a specific crisis.
Where can I check a fund's maximum drawdown?
FundSageAI's fund and portfolio analytics pages surface drawdown data alongside return metrics, letting you see the historical worst-case decline for a fund or your overall portfolio, not just its average performance.
Does a fund 'recovering' from a drawdown mean the drawdown period is over?
Yes — a drawdown period technically ends once the fund reaches a new all-time high above its previous peak; until then, even if the fund is rising from its trough, it's still technically 'in drawdown' relative to its prior high.
See this concept applied to your own portfolio
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