What is Max Drawdown?
Max Drawdown (MDD) measures the largest percentage drop from a fund's peak NAV to its lowest point before a new high was reached. If a fund's NAV went from ₹100 to ₹140, then fell to ₹84 before recovering, the Max Drawdown is −40% (from peak of ₹140 to trough of ₹84).
Unlike standard deviation and Sharpe Ratio, Max Drawdown is brutally simple: it shows you the worst-case scenario that actually happened to real investors. It is the metric most closely linked to investor behaviour — because it is the number that makes people panic and redeem at the bottom.
Max Drawdown in Indian Small Caps — Historical Data
| Event | Period | Nifty Smallcap 250 Drawdown | Top Funds' Drawdown |
|---|---|---|---|
| Global Financial Crisis | Jan 2008 – Mar 2009 | −72% | −65% to −78% |
| IL&FS / NBFC Crisis | Jan 2018 – Mar 2020 | −57% | −48% to −62% |
| COVID Crash | Feb 2020 – Mar 2020 | −40% | −35% to −47% |
| 2024 Small Cap Correction | Sep 2024 – Mar 2025 | −22% | −18% to −28% |
The 2018–2020 Drawdown That Killed SIP Conviction
Between January 2018 and March 2020, many small cap funds saw drawdowns of 50–60% over two full years. An investor who started a SIP of ₹10,000/month in January 2018 would have seen their portfolio value drop below the total amount invested for most of this period. This is the exact period when most retail investors stopped their SIPs — right before the massive 2020–2022 recovery that followed. Understanding Max Drawdown in advance is what keeps you invested through these events.
Drawdown Duration Matters as Much as Depth
A fund that fell 40% but recovered in 8 months is very different from one that fell 40% and took 3 years to recover. Always look at both depth (percentage) and duration (months to new high). Longer recoveries test investor psychology more severely.