Standard Deviation- Meaning, Formula & Example

Essentially, it quantifies the degree of unpredictability you can expect from the fund. A higher standard deviation means that the fund’s returns can swing more dramatically, indicating higher risk but also the potential for higher rewards. Conversely, a lower standard deviation suggests more consistent, stable returns, signalling lower risk. This metric can be incredibly useful for investors when aligning a fund’s risk profile with their own risk tolerance and investment objectives. For investors looking to make smart, risk-aware decisions, understanding what is standard deviation in mutual fund investments becomes crucial.

• Conversely, a lower standard deviation signifies less volatility, suggesting the returns are more likely to be close to the average.
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• Standard deviation is a crucial metric in mutual funds, indicating the degree of variation or volatility in the fund’s returns.
• Additionally, a fund’s high standard deviation does not necessarily indicate that it is extremely volatile, even if it belongs to a sector or category with a high standard deviation.
• A highly volatile fund poses greater risk to the investor than a fund with lower volatility.
• Investors should use it alongside other metrics for a well-rounded investment assessment.

Let’s know more about what this numerical value entails and how it can help you make more sound financial choices. This will depend on your appetite to lose your capital investment. The investor must invest in funds with lower standard deviation for lower risk. If one is willing to accept the volatility of the markets then he might prefer funds with a higher SD. A low standard deviation indicates that a mutual fund’s returns are relatively stable and close to the average.

Hence we are rewarding the fund for its good behaviour or less volatile behaviour. Let me ask you this – if a mutual fund has a high beta, do you think it is bad? Like I mentioned earlier, beta gives us a measure of the relative risk of the fund. In simpler terms, it’s a measure of how much the returns deviate from the average return over a period. In general, debt funds which are potentially less risky as compared to equity funds tend to have lower standard deviation. Standard Deviation originally emerged as a statistical concept.

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Utilised with historical returns, it serves as a gauge for the fund’s volatility over a specific timeframe. Let us navigate through its definition, formula and inner workings to grasp its significance in the financial markets and its impact on institutions. Sure, returns grab your attention, but understanding the risk factor is equally crucial. One proven method for gauging that risk is to use the statistical measure known as standard deviation. Often a go-to metric for financial experts, standard deviation can provide you with a broader perspective on investment risk.

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When it comes to investing, understanding the volatility of your mutual fund can help you make informed decisions. Standard deviation is the go-to metric for this it measures how much the returns of a mutual fund fluctuate compared to its average return. When you’re evaluating mutual funds, have you ever wondered how to gauge the risk level of your investment? That is why standard deviation in mutual funds is one of the main tools for this. But what is this phenomenon, and why should one pay attention to it?

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To put this context, if you invest Rs.10,000/- across funds at the same time, then by the end of the year the profit or loss can be anywhere in this range – The funds under consideration are the Axis Small-cap fund and Axis long term equity. I’d suggest you go through that entire chapter to understand the concept of standard deviation and volatility. This will help you not just in your MF investments, but also investments in stocks. By now, you should guess that since the beta is high, the fund gets penalised for its erratic behaviour.

Standard deviation is a statistical measure of the variability of returns for a mutual fund. It measures the degree to which a mutual fund’s returns deviate from what is standard deviation in mutual fund its average return. Standard deviation is an important measure of risk for mutual funds and should be used in conjunction with other measures of risk when evaluating investments. While it has its limitations, understanding standard deviation can help investors make informed investment decisions that align with their investment goals and risk preferences. Mutual funds are a popular investment option for individuals looking to invest in the stock market. They offer diversification, professional management, and ease of investing.

Which type of mutual funds tend to have lower standard deviation – equity funds or debt funds?

After all, investments are all about growing your wealth, not decreasing it! If the value is one, then the fund’s response is equivalent to the markets or the shift in the price of the mutual fund is the same as the benchmark movements. A beta value that exceeds one shows that the fund is more responsive than the benchmark movement.

Beta is a measure of volatility; it tells us how risky the fund is when compared to its benchmark. Beta is a relative risk and does not reveal the fund’s inherent risk. A high standard deviation means the fund’s returns are more spread out from the average, showing greater volatility. This can lead to higher potential gains but also greater losses. For aggressive investors willing to take on more risk, high standard deviation funds can offer the potential for higher returns. When markets are in a bull run, a high mutual fund SD might mean that the fund will outperform its average returns.

In contrast, investors who can afford higher risk for potential returns may prefer funds that have a larger standard deviation. We can see that the Sharpe ratio of the HDFC top 100 plan is higher and the fund provides lesser returns per unit of this volatility at 0.32. Whereas Kotak Bluechip is not only less volatile but also generates more returns per unit of volatility at 0.47. Similarly, HDFC Top 100 is more sensitive to market movements with a higher beta and a negative alpha implies that the fund may not have been able to keep up with the category returns. If the market conditions indicate there is high volatility, it implies the fund’s value will fluctuate significantly.

• The inherent risk of a fund is revealed by the ‘Standard Deviation’ of the fund.
• This can be mapped to your own risk appetite in order to decide if a fund works for you or not.
• If the returns move a lot from the average, the standard deviation is high, showing more volatility.
• A higher standard deviation denotes more fluctuation and, consequently, higher risk.

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It serves as an essential tool for assessing risk, comparing different funds, and constructing well-diversified portfolios. Remember that while standard deviation provides valuable insights, it should be used in conjunction with other performance metrics and research when making investment choices. As with any investment, seeking the guidance of a qualified financial advisor is recommended to develop a well-rounded investment strategy tailored to individual needs and circumstances.

Variance, the square of standard deviation, also quantifies dispersion from the mean but is less commonly used because its units are squared. You must be wondering what standard deviation is in the realm of mutual funds. It is a numerical figure, usually presented as a percentage, which helps indicate how far a mutual fund’s returns could vary from its average yearly earnings. When applied to historical performance data, it acts as a gauge for a fund’s volatility; a higher standard deviation implies more volatility. It’s important to note that standard deviation functions under the principle of averages, which aren’t inherently good or bad; their value comes from what you compare them to.

Finally, find the standard deviation by getting the square root of the variance. This value shows how much the fund’s returns can vary, indicating its level of risk or volatility. Standard deviation in mutual funds tells us how much a fund’s return can vary from its average return. It’s like a tool that helps investors understand the risk involved with a particular mutual fund. In simple terms, it helps investors figure out how stable or unstable the returns can be, aiding them in deciding where to invest their money.

Standard deviation is a statistical term that quantifies the degree of variation or dispersion of a set of data points from the mean (average) value. In the context of mutual funds, standard deviation measures the historical volatility of a fund’s returns over a specific period. When considering what is standard deviation in mutual funds, it’s important to understand that a higher standard deviation reflects greater volatility, implying higher risk and potential reward. Thus, analyzing the standard deviation of mutual funds is essential for investors aiming to match their risk tolerance with their investment choices. Standard deviation can be defined as a statistical measure expressed as a percentage that indicates the level to which returns of a mutual fund can deviate from its mean annual returns.

What Is the Difference Between Standard Deviation and Variance?

In this case, Fund B is a better choice because Fund B generates more return for every unit of risk undertaken. But in reality, you cannot isolate risk and reward; you need to factor in both these and figure out which of these two are better. Anyway, while at it, check the Alpha and Beta of both these funds. Generally speaking, the SD for mid and small-cap funds are higher compared to large-cap stocks. The SD of the small-cap fund is 23.95% while the long term equity is 19.33%, which implies that the small-cap fund is way riskier compared to the long term equity fund. The inherent risk of a fund is revealed by the ‘Standard Deviation’ of the fund.

However, it also heightens risk and uncertainty, which could lead to significant losses if not managed properly. To calculate market volatility, we use the standard deviation and variance formulas. By now, we know that volatility represents changes in the share price over time. To calculate it, we take the standard deviation and then multiply it by the square root of the number of years. Assume a scenario where fund ‘A’ gives a constant return of 11% over 4 years. Here, there is no significant movement in the returns of the fund.