A maximum drawdown (MDD) is the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum drawdown is an indicator of downside risk over a specified time period. This metric is used to assess the relative riskiness of a strategy to another.

It focuses on capital preservation and funds with a lower MDD (keeping other factors constant) are better. 


For example : There are 2 funds - 


Fund A : Standard dev : 12.5%, Average returns : 15% & MDD = 25%

Fund B : Standard Dev : 12.5%, Average returns : 15% & MDD = 30%


Here, Fund B should be chosen over fund A based on these metrics.