When a Portfolio Management Services (PMS) portfolio falls in value, the first reaction is often simple: concern.
Seeing a portfolio move from ₹50 lakh to ₹45 lakh can make an investor wonder whether something has gone wrong. But a falling portfolio does not automatically mean that the investment strategy has failed. Markets move through different cycles, individual stocks can decline, and even professionally managed portfolios can experience periods of losses.
This is where drawdown becomes an important concept for PMS investors.
A drawdown helps investors understand how much a portfolio has fallen from its previous peak before potentially recovering. Instead of looking only at the latest portfolio value, it gives investors a way to understand the depth of a decline and put that decline into context.
What Is a Drawdown in PMS?
A drawdown is the decline in a portfolio’s value from its highest point to a subsequent low point.
For example, suppose a PMS portfolio grows from ₹50 lakh to ₹60 lakh. It then falls to ₹51 lakh.
The portfolio has declined by ₹9 lakh from its peak of ₹60 lakh.
The drawdown is therefore:
₹9 lakh ÷ ₹60 lakh × 100 = 15%
So, the portfolio has experienced a 15% drawdown from its previous peak.
Drawdowns can be temporary. A portfolio may recover and eventually move above its previous high. However, the size and duration of a drawdown can provide useful information about the behaviour of an investment strategy.
Why Drawdowns Matter for PMS Investors
PMS investors often focus on returns when evaluating a portfolio manager.
Returns are certainly important, but they do not tell the complete story.
Two portfolios could generate similar long-term returns while experiencing very different periods of decline along the way.
For example, one strategy may experience relatively smaller declines but deliver steady growth. Another may experience larger falls and stronger recoveries.
Looking at drawdowns helps investors understand what the journey towards those returns has looked like.
This is particularly relevant for PMS because investors have direct exposure to a portfolio of individual securities, rather than simply owning units of a mutual fund.
A Falling Portfolio Does Not Always Mean the Strategy Is Broken
A decline needs to be examined in context.
Markets themselves can fall because of factors such as economic uncertainty, changing interest rates, geopolitical events, corporate earnings concerns or changes in investor sentiment.
During such periods, even fundamentally sound companies can experience price declines.
The more useful question is therefore not simply:
“Why is my portfolio falling?”
It is:
“Why is it falling, and is the reason consistent with the strategy?”
For instance, if a PMS follows a concentrated growth strategy, its portfolio may behave differently from a diversified value-oriented strategy during a market correction.
Understanding the investment approach is therefore essential before interpreting a drawdown.
Look at the Size of the Drawdown
The first factor to examine is the magnitude of the decline.
A 5% decline and a 30% decline represent very different experiences for an investor.
However, the percentage itself should not be considered in isolation.
A strategy investing in relatively volatile stocks may naturally experience larger fluctuations than one focused on more stable companies.
This is why investors should compare the drawdown with the historical behaviour of the strategy and the type of portfolio being managed.
The objective is not simply to find a portfolio that never falls. Rather, investors should understand the level of volatility they are taking in pursuit of their investment objectives.
Duration Matters Too
The size of a drawdown tells you how much a portfolio has fallen.
Its duration tells you how long the portfolio has remained below its previous peak.
Suppose a portfolio falls by 15% but recovers within a few months.
Another portfolio falls by 10% but remains below its previous high for several years.
The experience for the investor can be very different.
This is why PMS evaluation should consider both depth and duration.
A prolonged drawdown can also affect an investor’s confidence and financial planning, especially when the money may be needed for a specific goal.
How Long Does It Take to Recover?
Recovery is another important part of understanding drawdowns.
Suppose a portfolio falls from ₹100 to ₹80.
That is a 20% decline.
To return from ₹80 to ₹100, the portfolio needs to gain:
₹20 ÷ ₹80 × 100 = 25%
This illustrates an important point about losses: the percentage gain required to recover is greater than the percentage decline.
The deeper the drawdown, the larger the recovery required to reach the previous high.
For investors, this makes recovery time an important metric when evaluating portfolio performance.
Compare the PMS With Its Relevant Benchmark
A PMS portfolio should not be evaluated in isolation.
Investors should look at how the strategy has performed relative to an appropriate benchmark.
If both the portfolio and its benchmark declined during a market correction, the next step is to understand the difference between their performances.
If the PMS declined substantially more than its benchmark, investors may want to understand what drove that difference.
This does not automatically mean that the PMS has underperformed in a meaningful or permanent way. Portfolio construction, sector allocation, stock selection and the strategy’s stated objectives can all influence short-term performance.
The comparison simply provides additional context.
Understand What Is Inside the Portfolio
A drawdown can sometimes become easier to understand when investors examine the underlying holdings.
Look at factors such as:
- Which stocks contributed most to the decline?
- Are the losses concentrated in a few holdings?
- Has the portfolio’s sector exposure changed?
- Are the affected companies facing company-specific issues?
- Has the investment thesis changed?
- Has the portfolio manager changed the position?
These questions can help distinguish between a temporary market movement and a development that may require closer attention.
Portfolio Concentration Can Influence Drawdowns
PMS strategies can sometimes have meaningful exposure to a smaller number of companies.
When a portfolio is concentrated, the performance of individual stocks can have a larger effect on the overall portfolio.
If one major holding experiences a sharp decline, the impact may be visible at the portfolio level.
This is why investors should understand the portfolio’s concentration before investing.
Knowing how many companies are typically held, how large individual positions can become and which sectors may receive significant allocation can help investors understand the potential range of portfolio movements.
Check Whether the Investment Thesis Has Changed
One of the most important questions during a drawdown is whether the original investment thesis remains intact.
A stock can fall because the market has temporarily become pessimistic.
But it can also fall because the underlying business has changed.
For example, an investor may initially buy a company because of expectations around revenue growth, profitability, competitive advantages or industry expansion.
If those assumptions remain broadly intact, a falling share price may represent a different situation from one where the company’s fundamentals have materially deteriorated.
Investors should therefore focus on understanding the reason behind the portfolio manager’s decisions rather than reacting only to the portfolio value.
Avoid Judging a PMS Based on One Bad Month
Short-term performance can be noisy.
A single month, quarter or market correction may not provide enough information to evaluate a long-term investment strategy.
Instead, investors can examine performance across different market conditions and longer periods.
This can include periods of rising markets, corrections and broader market volatility.
The objective is to understand how the strategy behaves across different environments.
What Should PMS Investors Ask Their Portfolio Manager?
A drawdown can also be an opportunity to ask better questions.
Investors can ask their portfolio manager:
What caused the current drawdown?
Which holdings contributed most to the decline?
Was the decline driven by market-wide factors or company-specific factors?
Has the investment thesis for any major holding changed?
Has the portfolio construction changed because of the drawdown?
How does the current drawdown compare with the strategy’s historical drawdowns?
These questions can provide more useful information than simply asking when the portfolio will recover.
Drawdowns Are Part of the Investment Journey
Every investment strategy has its own risk and return characteristics.
A portfolio that generates returns through equity investments will inevitably experience periods of market volatility. The important part for investors is understanding what level of decline they are comfortable with and whether the strategy matches their investment objectives and risk tolerance.
Drawdown is therefore not simply a measure of loss.
It is a way of understanding how a portfolio behaves when markets or individual investments move against it.
For PMS investors, evaluating a falling portfolio requires looking beyond the latest number. The size of the drawdown, its duration, recovery period, benchmark performance, portfolio concentration and underlying investment thesis can all provide useful context.
Instead of asking only, “How much has my portfolio fallen?”, investors can ask a more meaningful question:
“What does this drawdown tell me about the strategy I have invested in?”
That shift can help investors evaluate portfolio performance with greater context and avoid making decisions based solely on short-term market movements.
