A drawdown measures the peak-to-trough decline in the value of an investment, portfolio, or fund over a specific period before a new peak is reached. Maximum drawdown (MDD) is the largest single peak-to-trough decline over the entire history of an investment, expressed as a percentage. For example, if a mutual fund's NAV falls from ₹200 to ₹130 before recovering, the drawdown is 35%. Drawdown is a critical risk metric for Indian investors because it reflects the actual lived experience of loss that investors endure — not just the theoretical volatility of returns. A fund with a high maximum drawdown requires a proportionally larger subsequent gain to recover to breakeven (a 50% drawdown requires a 100% gain to recover). SEBI's risk-o-meter for mutual funds is partially informed by drawdown characteristics. For direct equity investors, monitoring drawdown across individual holdings helps identify stocks experiencing fundamental deterioration versus temporary market-driven corrections.
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