8.44What is maximum drawdown?
1What is it?
Maximum drawdown is the largest peak-to-bottom fall in the fund’s value over a period.
2Why does it exist?
It shows the worst pain you would have felt. Ask: "Could I have held through that?"
3Diagram
4Calculation
Max drawdown = (Trough − Peak) ÷ Peak × 100
- NAV peaked at ₹100, fell to ₹60.
- (60 − 100) ÷ 100 = −40%.
Max drawdown = −40%. A 67% gain is needed to recover.
5Quick revision
- Worst peak-to-trough fall.
- Shows the pain to expect.
- Lower drawdown is better.
6Knowledge check
Q1. Peak ₹200, trough ₹150. Drawdown?Show answer
−25%.
Q2. Gain needed to recover from −50%?Show answer
100%.
Q3. Why does drawdown matter psychologically?Show answer
Big falls cause investors to panic-sell.
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