Drawdown and Fund Risk

I found your Mutual Fund story on fund manager changes and shifts in portfolio behaviour very insightful. Earlier, I had not paid much attention to fund manager transitions or similar developments. Could you please explain the term ‘drawdown’ mentioned in the story? - Amritha Rajan 

Editor Responds : Thank you for your kind words. In simple terms, drawdown refers to the decline in a fund’s value from its recent peak to its lowest point before it recovers. It measures how much an investment falls during a market correction. For example, if a mutual fund’s NAV rises to `100 and later drops to Rs 80, the drawdown is 20 per cent. In the mutual fund context, drawdown is important because it reflects downside risk and not just returns. Two funds may deliver similar long-term returns, but the one with lower drawdowns is generally easier to hold through volatile periods. Large drawdowns often trigger panic selling, which hurts investor outcomes. Hence, analysing drawdown helps investors understand a fund’s behaviour during stress and its risk management quality, especially when there are changes in fund management or portfolio strategy.