Downside Risk on WebNotes

Sortino ratio in mutual fund performance

Mon, 18 May 2026 00:00:00 +0000

The Sortino ratio is a risk-adjusted return measure that computes excess return per unit of downside deviation (volatility of negative returns only), rather than total volatility as in the Sharpe ratio . The Sortino ratio is more intuitive for most investors because it penalises only “bad” volatility (drawdowns) and not “good” volatility (upside).

Formula

Sortino ratio = (Scheme return - Risk-free return) / Downside deviation

Where:

Downside deviation: Standard deviation of only negative returns (or returns below a target threshold).

The downside deviation captures only the “loss volatility”, aligning with investor intuition that risk = potential loss.

Downside capture ratio in mutual funds

Tue, 12 May 2026 00:00:00 +0000

The downside capture ratio measures how much of a benchmark index’s negative return a mutual fund captures when the benchmark posts a loss. It is computed as the ratio of the fund’s average return during periods when the benchmark is negative, to the benchmark’s average return during those same periods, expressed as a percentage. A ratio below 100 means the fund falls less than the benchmark in down periods, an indicator of downside protection.

Maximum drawdown in mutual funds

Tue, 12 May 2026 00:00:00 +0000

Maximum drawdown (MDD) is the maximum observed loss from a peak NAV to a subsequent trough NAV, before a new peak is achieved, over a specified period. It represents the worst-case scenario for an investor who happened to invest at the highest point and exited at the lowest point in the measurement window. Maximum drawdown is expressed as a negative percentage and is one of the most intuitive and investor-relevant risk metrics, unlike standard deviation, it directly answers the question: “What is the worst I could have lost?”

Sortino ratio in mutual funds

Tue, 12 May 2026 00:00:00 +0000

The Sortino ratio is a risk-adjusted performance measure that refines the Sharpe ratio by substituting total standard deviation with downside deviation, a measure computed only from returns that fall below a minimum acceptable return (MAR), typically the risk-free rate or zero. The intuition is straightforward: investors are harmed by downside volatility but benefit from upside volatility, so penalising both equally (as the Sharpe ratio does) misrepresents the true cost of risk.