Why fund drawdown and recovery periods matter
Market ups and downs are part of every investor’s journey. Understanding these fluctuations is key to staying focused on your long-term investment objectives.
Published on 12 March 2026
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4 min read
What is a drawdown?
A drawdown occurs when your investment declines in value from its peak to a lower point. It is not the same as a loss, which happens when you sell an asset for less than you bought it. A drawdown reflects a temporary fall in value, which may or may not recover.
It is calculated as the percentage difference between the highest point (the peak value) and the lowest point that follows (the trough value).
For example, if a stock reaches a high of ₹100 (peak) and later falls to ₹80 (trough), the drawdown is 20% (calculated as [(Peak Value - Trough Value) / Peak Value] x100 or [(100 - 80) / 100] x 100).
It is calculated as the percentage difference between the highest point (the peak value) and the lowest point that follows (the trough value).
For example, if a stock reaches a high of ₹100 (peak) and later falls to ₹80 (trough), the drawdown is 20% (calculated as [(Peak Value - Trough Value) / Peak Value] x100 or [(100 - 80) / 100] x 100).
How rebalancing helps?
The recovery period is the time it takes for an investment to return to its previous peak value after a drawdown. How long this is will depend on market conditions, the asset’s performance and the size of the drawdown. A short recovery period indicates a quick rebound, while a longer one suggests a more prolonged comeback.
The chart below shows the peak and trough points during drawdown and recovery periods.
For illustration purposes only
The chart below shows the peak and trough points during drawdown and recovery periods.
For illustration purposes only
Why drawdown and recovery are important
Understanding drawdown and recovery periods help investors assess risk and make informed investment decisions. A stock or fund with frequent large drawdowns may not be suitable for retirees and other short-term investors whose main priorities are to protect the value of their savings. Long-term investors, on the other hand, may be able to tolerate higher drawdowns as they have more time on their side and can afford to wait for the stock or fund to recover its value.
For example, during the 2008 financial crisis, global stock markets lost more than half their value, and many took years to recover. If you were invested in equities, you could have faced significant drawdown, and a long wait before your portfolio returned to its previous peak.
For example, during the 2008 financial crisis, global stock markets lost more than half their value, and many took years to recover. If you were invested in equities, you could have faced significant drawdown, and a long wait before your portfolio returned to its previous peak.
Recent real-world example: the COVID-19 market crash
The stock market crash following the outbreak of COVID-19 in 2020 is another opportunity to understand drawdown and recovery periods.
The table below shows a selection of funds and how they behaved during the pandemic. We are not deliberately naming the funds; but the figures capture their real-world performance.
As the data shows, some funds fell more sharply than others and took longer to recover. Fund G, for instance, took 231 days to recover from a 27.19% drawdown while Fund E fell less sharply and recovered more quickly.
The table below shows a selection of funds and how they behaved during the pandemic. We are not deliberately naming the funds; but the figures capture their real-world performance.
| Funds | COVID Drawdown (%) | Recovery Time |
|---|---|---|
| Fund A | -27.98 | 181 days |
| Fund B | -17.79 | 124 days |
| Fund C | -32.58 | 159 days |
| Fund D | -25.03 | 159 days |
| Fund E | -13.53 | 48 days |
| Fund F | -27.15 | 154 days |
| Fund G | -27.19 | 231 days |
As the data shows, some funds fell more sharply than others and took longer to recover. Fund G, for instance, took 231 days to recover from a 27.19% drawdown while Fund E fell less sharply and recovered more quickly.
Why this matters to you
Drawdown and recovery data illustrates:
• A fund’s historical risk
• The volatility of different investments
With this information, you can assess your comfort level with risk if you are investing. If you are investing for the long term, you may be willing to weather larger drawdowns, or, in other words, tolerate more risk and volatility. However, if you are nearing an investment goal, such as retirement or buying a home, you may want to protect your savings. This means sticking to less volatile investments that are likely to have lower drawdowns and shorter recovery periods.
• A fund’s historical risk
• The volatility of different investments
With this information, you can assess your comfort level with risk if you are investing. If you are investing for the long term, you may be willing to weather larger drawdowns, or, in other words, tolerate more risk and volatility. However, if you are nearing an investment goal, such as retirement or buying a home, you may want to protect your savings. This means sticking to less volatile investments that are likely to have lower drawdowns and shorter recovery periods.
Drawdown vs. recovery: The non-linear effect
When it comes to investing, it's crucial to understand that losses and gains are not symmetrical. A percentage loss in your portfolio does not require an equal percentage gain to recover. In fact, the deeper the loss, the more disproportionately large the gain needed to break even.
For illustration purposes only
This phenomenon is due to the compounding effect. For instance:
• If your portfolio drops by 50%, it means it has halved in value.
To return to the original value, you now need to double the remaining amount - a 100% gain.
• A 10% loss requires a 11% gain to recover
• A 20% loss requires a 25% gain to recover
• A 50% loss requires a 100% gain to recover
This non-linear relationship highlights the importance of risk management. Large drawdowns can be devastating and difficult to recover from. The steeper the fall, the harder and longer the climb back to breakeven.
For illustration purposes only
This phenomenon is due to the compounding effect. For instance:
• If your portfolio drops by 50%, it means it has halved in value.
To return to the original value, you now need to double the remaining amount - a 100% gain.
• A 10% loss requires a 11% gain to recover
• A 20% loss requires a 25% gain to recover
• A 50% loss requires a 100% gain to recover
This non-linear relationship highlights the importance of risk management. Large drawdowns can be devastating and difficult to recover from. The steeper the fall, the harder and longer the climb back to breakeven.
How can you manage the impact of drawdowns in your portfolio?
• Risk profiling: Make sure you understand the risks of any investment—and whether it aligns with your risk appetite, time horizon and investment objectives—before you invest.
• Time horizon: Consider how much time you have to make up any losses. Short-term investors such as retirees may be unsuited to volatile funds prone to sharp drawdowns.
• Investor Type: Understand what kind of investor you are and your risk tolerance level. If you’re having to check your portfolio balance constantly or you’re afraid to look, then you’re probably taking on too much risk for your personal comfort level.
• Diversification: Spread your money across asset classes (e.g. equities, fixed income, gold). If one asset type falls, others might not, helping to balance out your overall returns.
• Asset allocation: Decide how much money goes into each pot, based on your risk tolerance and investment objectives. For example, a younger investor might invest more in equities for higher potential growth, while someone nearing retirement may prefer safer options such as fixed income products.
• Regular portfolio review: Check your investments from time to time to make sure they still match your investment objectives and risk appetite. Adjust them as needed if your situation changes.
• Time horizon: Consider how much time you have to make up any losses. Short-term investors such as retirees may be unsuited to volatile funds prone to sharp drawdowns.
• Investor Type: Understand what kind of investor you are and your risk tolerance level. If you’re having to check your portfolio balance constantly or you’re afraid to look, then you’re probably taking on too much risk for your personal comfort level.
• Diversification: Spread your money across asset classes (e.g. equities, fixed income, gold). If one asset type falls, others might not, helping to balance out your overall returns.
• Asset allocation: Decide how much money goes into each pot, based on your risk tolerance and investment objectives. For example, a younger investor might invest more in equities for higher potential growth, while someone nearing retirement may prefer safer options such as fixed income products.
• Regular portfolio review: Check your investments from time to time to make sure they still match your investment objectives and risk appetite. Adjust them as needed if your situation changes.
Bottom line: Returns matter, but so does how much risk you take
Maximising returns is important but so is managing the risks that come with them. A SEBI Registered Investment Adviser (RIA) will take drawdown history into account to guide you towards funds that align with your risk tolerance, investment horizon and investment objectives, helping you invest in what is right for you.
Disclaimer: This article is for educational purposes only.
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