Mutual fund risk measures: volatility, Sharpe, Sortino, drawdown
Written and reviewed by Omm · Last reviewed · General information, not investment advice
Returns tell you what a fund earned. Risk measures tell you what it took to earn it. This site shows four, each calculated from the last three years of daily NAVs.
Volatility (standard deviation)
Take each day’s percentage change in NAV, measure how widely those changes scatter, and scale it up to a yearly figure (× √252 trading days). A fund with 20% volatility swings much more than one with 8%. Equity funds are more volatile than debt funds, small-cap funds more than large-cap funds. Compare volatility only within a category.
Sharpe ratio
Sharpe = (average annual return − risk-free rate) ÷ volatility
It asks how much return you got above a safe alternative for each unit of volatility. This site uses a 6.5% yearly risk-free rate. A higher Sharpe ratio is better, but it can mislead when returns are very low or negative, and it treats big gains and big losses as equally “risky”.
Sortino ratio
A variation that divides by downside deviation, which only counts the days when the fund did worse than the risk-free rate. It does not penalise a fund for upward swings, so it is often a fairer measure for funds with uneven returns.
Maximum drawdown
The largest peak-to-trough fall in the period. It answers a practical question: what was the worst fall an investor had to sit through? A fund with a 3-year drawdown of −35% fell by more than a third at some point, even if it finished the period higher. This is often the number that decides whether an investor stays invested or sells in a panic.
How to use them together
- Compare within the same category. Comparing a liquid fund with a small-cap fund is meaningless.
- Look at return and risk together: two funds with the same return but different drawdowns offer different experiences.
- Check rolling returns for consistency.
- Remember the window: three years may not include a major fall, so a calm period can flatter a fund.
Limits
All of these describe the past and depend on the period chosen. They do not capture risks that have not occurred yet, such as a debt fund’s credit risk before a default. The riskometer on each scheme’s documents is SEBI’s official risk label, and should be read alongside these figures.