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How to Invest in SIP A Beginner's Guide
In summary
Maximum Drawdown (MDD) is a historical risk measure showing the largest fall in an investment's value from a peak to the lowest point before recovery. It is expressed as a percentage and focuses specifically on downside movement.
- MDD measures the largest historical peak-to-trough decline.
- The formula expresses the decline as a percentage.
- A 30% drawdown means value fell 30% from its peak.
- MDD does not predict future losses or returns.
- Compare MDD with returns and the SEBI Riskometer.
- Compare funds within similar categories and investment horizons.
For mutual fund investors, MDD can add context to return data by showing how much volatility an investment experienced during difficult periods.
What is Maximum Drawdown?
Maximum Drawdown is the largest percentage decline in an investment's value from its highest point to its lowest subsequent point before recovery.
For example, if a mutual fund's NAV rises to Rs. 100 and subsequently falls to Rs. 70 before recovering, the Maximum Drawdown is 30%.
Unlike a return measure, which focuses on growth over a period, MDD focuses on the extent of a historical decline. This makes it useful when assessing downside risk and understanding how an investment behaved during market stress.
MDD should not be considered in isolation. The Standard Deviation of a fund can provide additional information about the variation in its returns over a period.
What is the Maximum Drawdown formula?
The Maximum Drawdown formula calculates the percentage decline between an investment's peak value and its subsequent trough.
Maximum Drawdown (%) = ((Peak Value − Trough Value) ÷ Peak Value) × 100
Here:
- Peak Value: The highest value reached before the decline.
- Trough Value: The lowest value reached after the peak and before recovery.
- Maximum Drawdown: The resulting percentage decline.
For example, if the peak NAV is Rs. 120 and the subsequent lowest NAV is Rs. 90:
MDD = ((Rs. 120 − Rs. 90) ÷ Rs. 120) × 100 = 25%
The fund therefore experienced a 25% decline from its peak before recovering.
How do you calculate Maximum Drawdown?
Calculating MDD requires you to examine the investment's historical value over a defined period and identify the largest peak-to-trough decline.
- Identify the peak: Find the highest NAV or portfolio value during the period being analysed.
- Identify the trough: Find the lowest value after that peak and before a subsequent recovery.
- Calculate the decline: Subtract the trough from the peak.
- Divide by the peak: Divide the decline by the peak value.
- Convert to a percentage: Multiply the result by 100.
For example, an investment rises from Rs. 80 to Rs. 120 and later falls to Rs. 90. Its MDD is:
((Rs. 120 − Rs. 90) ÷ Rs. 120) × 100 = 25%
The calculation measures the historical decline; it does not indicate how quickly the investment will recover or whether it will recover at all.
How does Maximum Drawdown help assess mutual fund risk?
MDD provides a historical view of downside exposure. It can help you understand the extent of a fund's decline during a difficult market phase, rather than looking only at its overall return.
When evaluating mutual funds, consider MDD alongside other information.
| Factor | What it shows | Why it matters |
|---|---|---|
| Maximum Drawdown | Largest historical peak-to-trough fall | Shows downside exposure |
| Returns | Historical growth over a period | Provides performance context |
| SEBI Riskometer | Scheme-level risk classification | Indicates the scheme's labelled risk level |
| Investment horizon | Planned holding period | Helps assess whether the investment timeframe matches your objective |
| Fund category | Equity, debt, hybrid, ELSS, or thematic | Provides context for comparing risk and return |
Last updated: September 2026
The SEBI Riskometer classifies mutual fund schemes as Low, Low to Moderate, Moderate, Moderately High, High, or Very High. It should be considered alongside quantitative and qualitative factors rather than treated as a forecast of future returns.
How should you compare Maximum Drawdown across funds?
MDD is most meaningful when you compare investments with similar objectives and risk characteristics. Comparing an equity fund with a short-duration debt fund solely on MDD can produce an incomplete picture because the underlying assets and risk drivers differ.
You can also consider Trailing Returns Vs Rolling Returns when reviewing historical fund performance. Rolling returns can provide multiple overlapping observations across a period, while MDD focuses on the largest historical decline.
A fund with a lower MDD has historically experienced a smaller peak-to-trough fall over the period measured. However, this does not establish that it will have lower drawdowns in the future.
What factors can influence Maximum Drawdown?
MDD can vary depending on the underlying assets, market conditions, portfolio construction, and the period selected for analysis.
Asset class and fund category
Equity-oriented funds can experience substantial declines during broad market corrections. Debt funds have different risk drivers, including interest-rate and credit risks. Hybrid funds may have characteristics influenced by their equity and debt allocation.
Market conditions
Economic events, changes in interest rates, corporate earnings, liquidity conditions, and investor sentiment can influence asset prices and therefore affect historical drawdowns.
Understanding market psychology can provide additional context for how investor behaviour and sentiment can contribute to periods of market stress.
Measurement period
MDD depends on the period examined. A calculation based on five years of data can produce a different result from one based on three years because the periods may contain different market cycles.
What are the limitations of Maximum Drawdown?
MDD is useful for analysing historical downside, but it has limitations that should be considered before using it to assess an investment.
It is backward-looking
MDD is calculated from historical values. It cannot predict the size or timing of a future decline.
It does not show recovery time
Two funds can have the same MDD but take different lengths of time to recover from their respective drawdowns. MDD alone does not capture this recovery period.
It does not measure all types of risk
MDD does not independently capture factors such as credit risk, liquidity risk, interest-rate risk, or portfolio concentration. Other measures and qualitative information may therefore be necessary.
It can be affected by the selected period
Changing the observation period can change the calculated MDD. The period should therefore be considered when comparing historical figures.
Can Maximum Drawdown affect how you evaluate a SIP?
MDD does not directly determine SIP returns. However, it can help you understand how a mutual fund has behaved during historical declines.
For example, if a fund experiences a significant drawdown while you continue investing through an SIP, subsequent instalments purchase units at the prevailing NAV. This may result in more units being acquired at lower prices, but it does not remove market risk or guarantee better returns.
When evaluating an SIP, consider MDD alongside the fund's investment objective, category, costs, risk level, investment horizon, and your ability to remain invested during periods of volatility.
Conclusion
Maximum Drawdown shows the largest historical decline from an investment's peak to its subsequent trough. It can help investors understand downside exposure and add context to conventional return measures.
For mutual funds, MDD is best considered alongside the SEBI Riskometer, returns, fund category, investment horizon, portfolio characteristics, and other relevant risk measures. Historical drawdowns can provide useful context, but they cannot predict future losses or recovery patterns.
Last reviewed: September 2026
Mutual funds are subject to market risk. Please read the scheme-related documents carefully before investing.
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Can two investments have the same Maximum Drawdown but different risk profiles?
Yes. MDD captures one historical peak-to-trough decline. Investments can differ in volatility, liquidity, credit exposure, asset allocation, and recovery behaviour despite having the same MDD.
What does a drawdown of 0% indicate?
For the period and data being analysed, a 0% MDD means no decline from a previous peak to a subsequent lower value was recorded. It does not mean the investment has no future downside risk.
Can Maximum Drawdown be calculated for an entire portfolio?
Yes. MDD can be calculated using the portfolio's historical values rather than the value of an individual fund or security. This can help assess the portfolio's largest historical decline.
Is recovery from a drawdown the same as earning the same percentage loss back?
No. The percentage gain required to recover depends on the size of the decline. After a 50% fall, for example, an investment needs to rise 100% from its reduced value to return to its previous peak.
Should Maximum Drawdown be reviewed every time a fund's NAV changes?
Not necessarily. MDD is generally more useful when assessed over a meaningful historical period and alongside other fund metrics rather than reacting to individual NAV movements.
Can a fund's Maximum Drawdown change without a new market crash?
Yes. A new peak or subsequent trough within the selected observation period can change the calculated MDD even without a broad market crash.
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Disclaimer
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