Mutual Funds and the Drawdown Metric

When you are investing in mutual funds, the relative drawdown of the fund should be something that you consider. Here are the basics of drawdown and what it means to you as a mutual fund investor.

Mutual Fund Drawdown

The drawdown of a particular investment is equal to the distance between the highest peak and the lowest trough on a price chart. Therefore, it deals with how far the value of the investment decreases before rising again. This statistic can tell you how risky a particular form of investment is. If an investment provides you with a larger return but has a very of large drawdown to go with it, you may want to think twice about investing in it because of the higher risk associated with that type of investment. You may be able to get the same overall return without risking as much by investing in a mutual fund with a lower drawdown.

However, just because a fund has a large drawdown does not mean that you should stay away from it completely. For example, let's say a mutual fund appreciated 15 percent. Then let's say that it had a 6 percent drawdown. While this might seem like a large drawdown, you are still up percentage-wise overall.

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