Most investors evaluate a strategy by one number: CAGR. “This strategy returned 42% last year” sounds great. But 42% with a 58% drawdown in between, where your ₹10 lakh fell to ₹4.2 lakh before recovering, is a very different experience than 42% with a maximum 15% drawdown.
Risk metrics exist to give you the complete picture. Before deploying real money into any strategy, you should be able to read and interpret all six metrics here. Vendors who show you only CAGR are hiding something.
The risk cost Indian investors actually pay
59
Nifty 500 max drawdown, Mar 2020
NSE daily data
7.15
10Y G Sec yield used as risk free rate
RBI Apr 2026
36
months average underwater period 2008 and 2020
CRISIL
1.0
Sharpe threshold that separates good from average
Industry benchmark
NSE
SEBI
RBI
AMFI
How to read a backtest in the right order
1
Max Drawdown
Can you survive it
2
CAGR
Is the reward worth it
3
Sharpe + Sortino
Reward per unit of pain
4
Beta
Market dependence
5
Alpha
Genuine value add
Start with drawdown. Not CAGR. Most vendor decks reverse the order because CAGR is the cleanest number to market. Drawdown is the one that decides whether you stay invested long enough to collect the CAGR.
The six metrics you need to know
CAGR
Compound Annual Growth Rate
How fast your money grew, annualised
CAGR = (Ending Value / Starting Value) ^ (1 / Years) − 1
CAGR converts total return over any period into an equivalent annual rate. ₹1 lakh growing to ₹3.2 lakh in 5 years = CAGR of 26%. Clean, comparable across strategies, and essential. But completely silent about the journey.
⚠ CAGR says nothing about path. A 26% CAGR could involve a 55% drawdown in year 2, or it could have been smooth every year. Always pair with drawdown.
MDD
Maximum Drawdown
The worst peak-to-trough loss in history
MDD = (Trough Value − Peak Value) / Peak Value
Maximum Drawdown is the largest percentage decline from any portfolio peak to the subsequent trough before a new peak. If your ₹10 lakh portfolio reached ₹15 lakh then fell to ₹8.5 lakh before recovering, MDD = (8.5−15)/15 = −43.3%. This is the most important risk metric for most retail investors, it represents the actual loss you must stomach and not panic-sell through.
⚠ MDD is backward-looking. The next drawdown may be worse than anything in the backtest. Treat MDD as a floor estimate for future worst-case scenarios, not a ceiling.
SR
Sharpe Ratio
Return per unit of total risk
Sharpe = (Portfolio Return − Risk-Free Rate) / Standard Deviation of Returns
Sharpe measures how much excess return you earned for each unit of volatility. In India, the risk-free rate is approximated by the 10-year G-Sec yield (~7%). A Sharpe above 1.0 is good; above 1.5 is excellent; above 2.0 is exceptional for long-only equity. Below 0.5 suggests the returns don’t justify the volatility.
⚠ Sharpe penalises upside volatility equally with downside. A strategy with occasional large gains has a lower Sharpe than a smoothly grinding one, even if the big-swing strategy is actually better. This is why Sortino exists.
SOT
Sortino Ratio
Return per unit of downside risk only
Sortino = (Portfolio Return − Risk-Free Rate) / Downside Deviation
Sortino uses only downside volatility (negative returns below the threshold) in the denominator. Upside volatility is ignored entirely, which is how most investors actually experience risk. A Sortino above 1.5 is generally good. When Sortino is significantly higher than Sharpe, it signals the strategy’s volatility is mostly on the upside.
✓ If Sortino >> Sharpe, that’s actually good news: the volatility is mostly upside swings, not downside losses.
β
Beta
Sensitivity to market movements
Beta = Covariance(Portfolio, Market) / Variance(Market)
Beta measures how much your portfolio moves when the market moves. Beta = 1.0 means lockstep with Nifty 500. Beta = 1.4 means when Nifty falls 10%, your portfolio tends to fall 14%. Momentum strategies typically have Beta above 1 (they own high-momentum stocks which are often high-beta). Low Volatility strategies have Beta below 1.
⚠ Low beta ≠ low risk. A low-beta portfolio can still carry high concentration or sector risk that doesn’t show up in the beta calculation. Always read beta alongside drawdown.
α
Alpha
Return above what market exposure explains
Alpha = Portfolio Return − [Risk-Free Rate + Beta × (Market Return − Risk-Free Rate)]
Alpha is the return you earned that can’t be explained by simply owning the market at your portfolio’s beta. If your strategy returned 22% but the beta-adjusted benchmark expectation was 16%, your alpha is +6%. Consistent positive alpha over 5+ years, after costs, is the ultimate evidence that a systematic strategy adds real value.
✓ Alpha above 0% annually after costs means the strategy genuinely adds value beyond passive market exposure. This is a high bar, only systematic, evidence-based strategies tend to clear it consistently.
Reading metrics together
| Metric | What it answers | Minimum bar | Excellent |
|---|---|---|---|
| CAGR | How fast did money grow? | > Nifty 500 CAGR | > Nifty 500 + 8% |
| Max Drawdown | What was the worst loss? | < 45% | < 25% |
| Sharpe Ratio | Return per unit volatility? | > 0.8 | > 1.3 |
| Sortino Ratio | Return per unit downside? | > 1.0 | > 1.8 |
| Beta | Market sensitivity? | Understood & intentional | Context-dependent |
| Alpha | Value above market? | > 0% annualised | > 5% annualised |
Where attention actually goes vs where it should go
CAGR 62
Sharpe ratio 18
Max Drawdown 12
Alpha + others 8
Share of attention across 148 strategy vendor decks I reviewed between 2022 and 2025. Most lead with CAGR. Drawdown is almost always buried. Flip this order and you change your outcome.
Max drawdown across Indian fund categories over the last 10 years
Max peak to trough decline 2015 through Mar 2025. Source NSE and Value Research. The bar is not the return, it is the loss you had to watch without selling.
From my notebook, March 2020. I had the Nifty 500 momentum sleeve, fully invested, coming into Feb 2020. Over the next 4 weeks the book drew down 34% peak to trough. My CAGR over the prior 3 years was 21%. The CAGR looked great in every deck I had shown clients. The drawdown was the only number that mattered the day my phone started ringing. I did not sell because I had sized the position to exactly this scenario in advance. That single decision to pre size for a 45% tail, not the CAGR, is what let me compound from 2020 onward. Drawdown first. Always.
A worked example
Two hypothetical strategies on Nifty 500 over 5 years:
Strategy A, Momentum
CAGR: 38%
Max Drawdown: −44%
Sharpe: 1.12
Sortino: 1.65
Beta: 1.31
Alpha: +22%
Max Drawdown: −44%
Sharpe: 1.12
Sortino: 1.65
Beta: 1.31
Alpha: +22%
Strategy B, Quality
CAGR: 26%
Max Drawdown: −22%
Sharpe: 1.48
Sortino: 2.10
Beta: 0.78
Alpha: +11%
Max Drawdown: −22%
Sharpe: 1.48
Sortino: 2.10
Beta: 0.78
Alpha: +11%
Strategy A has the higher CAGR. Strategy B has better risk-adjusted returns. Which is better? It depends on you, your risk tolerance, your horizon, and whether you can actually hold through a 44% drawdown without selling at the bottom.
The CAGR trap: Strategy vendors routinely show only CAGR. A 35% CAGR with 65% max drawdown means you needed to hold through a 65% loss to get that return. Most investors can’t and don’t, they panic-sell at the bottom, locking in the loss and missing the recovery. A lower CAGR with lower drawdown may be the far better real-world outcome.
◆ RupeeCase shows all six
Every strategy and backtest on RupeeCase shows CAGR, max drawdown, Sharpe, Sortino, Beta, and Alpha. The tearsheet also shows the equity curve, underwater plot (drawdown over time), rolling Sharpe, and monthly return heatmap, so you see the full shape of returns, not just the headline number.
Full tearsheet on every strategy
All 6 risk metrics + equity curve + drawdown chart
No cherry-picked numbers. Full transparency on every backtest.
RC
Put learning into practice. Every concept in Path 2 maps directly to a tool in the RupeeCase terminal.
Glossary, Module 2.3
CAGR
Compound Annual Growth Rate, the smoothed annual return from start to end value over N years. Does not reflect path or volatility.
Max Drawdown
Largest peak-to-trough percentage decline in portfolio value before a new peak is reached. The most psychologically important risk metric.
Sharpe Ratio
Excess return (above risk-free rate) divided by total standard deviation. Penalises both upside and downside volatility.
Sortino Ratio
Like Sharpe but uses only downside deviation. Penalises bad volatility only, ignoring upside swings.
Beta
Sensitivity to market returns. Beta > 1 amplifies market moves; beta < 1 dampens them. Not the same as total risk.
Alpha
Returns above what market exposure (beta) would predict. Positive alpha = genuine value added beyond passive market ownership.
Underwater plot
Chart showing the portfolio’s percentage decline from its most recent peak over time. Shows the duration and depth of each drawdown period.
Sources & further reading
- → NSE Indices, Index Methodology (performance measurement framework)
- → SEBI, Performance Benchmarking Guidelines for Investment Funds
- → Sharpe, W.F. (1994). The Sharpe Ratio. Journal of Portfolio Management.
- → Sortino, F. & van der Meer, R. (1991). Downside Risk. Journal of Portfolio Management.
- → Fama-French Data Library, Alpha and factor return calculations
All content on this page is original work by Tanmay Kurtkoti and QC Alpha Technologies Pvt Ltd. Protected under Indian copyright law. tanmay@rupeecase.com
Quick check, Module 2.3
0 correct · 0 answered
Module 2.3 complete
3 correct. Continue when ready.
Research Lab Qualifier
Path 2, Module 3 of 5, complete all 5 + path test to unlock
✅ 2.1 Rules vs Gut→✅ 2.2 Factors→📍 2.3 Risk Metrics→2.4 Backtesting→2.5 Build a Strategy
Calculator
Sharpe Ratio Calculator
Excess return per unit of total volatility. Annualised inputs.
Quick check, Module 2.3
3 questions. Get 2 right to mark this module complete.
0 of 3 answered
Module complete. Keep going.
PRACTICE WHAT YOU LEARNED
Try systematic strategies on RupeeCase | free paper trading.