Standard Deviation in Mutual Fund Formula & Returns

This helps investors choose funds that fit their risk tolerance and investment goals. Standard deviation in mutual funds is a statistical tool used to measure the variability of a fund’s return relative to its average return, indicating the level of risk and volatility involved. To figure out the standard deviation for a mutual fund, you first collect the fund’s returns over a certain time. Next, calculate the variance, which is the average of the squared differences between each return and the average return.

What Is Standard Deviation in Mutual Funds?

The main reason behind this is market volatility, a constant and recurring change that causes share prices to rise and fall over time. It is a risk – adjusted metric to gauge the performance of the mutual fund and is calculated as It is used to measure the dispersion of the actual return from the mutual fund’s expected return. This can be risky because it means there’s a bigger chance of losing money.

Debt funds usually have lower standard deviations; they depict a relatively stable return and reduce risk. This also makes it easier for investors to select an investment strategy that comes well with their risk capacity and market conditions. The risk levels of varied funds can be easily compared with this metric, which helps the investor make a more informed investment decision. For instance, more risk-averse investors may like a portfolio with a more minor standard deviation for stability.

A normal standard deviation for a portfolio varies based on the type of investments. There’s no exact number, so it’s important to compare it with similar portfolios to see if it’s normal. If a folio’s returns follow a normal distribution, most of the profits will be close to the average return. Stats say, about 68% of the returns will fall within 1 standard deviation of the average. Plus, about 95% of the returns will fall within two standard deviations. As opposed to that, in low-value, the returns are more consistent and close to the average.

By applying the standard deviation formula, we find that the standard deviation of the fund’s annual returns is approximately 2.87%. Standard deviation, often abbreviated as “std,” is a key statistical measure that assesses the dispersion or variability of a set of data points. In simpler terms, it indicates how much individual data points differ from the mean (average) value. A fund or security with a high standard deviation has a greater degree of price volatility, while a low standard deviation indicates less volatility. However, standard deviation along cannot show the value of a fund or predict its future movement. It should be used with other forms of fundamental analysis before making any investment decision.

• 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.
• Because if S&P Sensex 500 falls by  1%, then Tata Multicap fund is expected to fall by only 0.65% and not 0.95%.
• Standard deviation in mutual funds is a statistical tool used to measure the variability of a fund’s return relative to its average return, indicating the level of risk and volatility involved.
• If a fund can make stable returns over time, the mutual fund standard deviation is likely to be low.

Understanding Standard Deviation in Mutual Funds: A Guide for Investors

In such a situation, the SD of each mutual fund needs to be calculated separately in order to arrive at the overall standard deviation at the portfolio level. A common question regarding where to invest money is related to how to choose an investment that provides an ideal balance between risk and returns. Apart from standard deviation, other parameters that can be used to choose a suitable investment include alpha, beta, Sortino and Sharpe ratio.

Standard deviation in mutual funds helps measure risk by showing how much returns fluctuate over time. It is a statistical measure quantifying the historical volatility of a fund’s returns. Understanding this helps investors pick funds that match their comfort level with risk and their financial goals. Standard deviation is an essential measure for mutual fund investors. It gives insights into volatility and the risk level of a fund’s return. Understanding the standard deviation helps investors make better, more rational choices as it ensures their portfolios are in sync with the risks for their investment plans.

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Market volatility is a fundamental part of the broader market dynamics. Instead of being fearful of it, it is important to understand volatility measurements and make decisions to maximise gains and minimise losses. Share prices in a stock market fluctuate constantly, leading to uncertainty and making it difficult for investors to decide which fund to invest in.

The Hidden Downsides of Mutual Funds: What Every Investor Should Consider

However, if the volatility is low, the value of the fund will remain relatively stable. Understanding a mutual fund’s volatility is important to help investors gauge the potential risk and return. The sharpe ratio refers to the average return that you can expect based on the risk free rate per unit of the total risk. You can use the sharpe ratio to understand the mutual fund’s past or future performance, which can help you decide whether or not to invest in it. Alpha – measures how a fund outperforms its benchmark index, for example, the Sensex.

Similarly 95% of the time the future returns are likely to fall between 4% and 16% (10% average plus or minus twice the standard deviation i.e. 6). A fund with a low standard deviation over some time (3-5 years) can mean that the fund has given consistent returns over the long term. Good volatility typically refers to moderate to high levels that enable traders and investors to take advantage of price movements. It supports active trading strategies and indicates healthy market dynamics, but excessive volatility can raise risk and uncertainty. High market volatility can create opportunities for traders and investors to capitalise on price fluctuations.

Despite the usefulness of standard deviation, investors should never choose mutual funds entirely on the basis of statistical tools. Other data elements, like Alpha and Beta, require equal consideration. When investing in a mutual fund, returns are frequently used as an evaluation metric. In addition to returns, a reasonable risk assessment will assist you in making prudent decisions. Using the statistical instrument standard deviation is one method for evaluating risks and volatility. The standard deviation, a ratio commonly used by fund managers, is of significant help to investors.

Understanding standard deviation is not an academic exercise; it is the foundation of constructing a portfolio you won’t abandon at the worst possible time. A fund can have a moderately high standard deviation but an excellent downside capture ratio, meaning it participates in rallies but protects better in downturns. This is the sign of a skilled active manager or a resilient strategy. PPF is a combination of safety, tax benefits and returns that make it an excellent savings-cum-investment product With this account, you can safely deposit or withdraw funds at any time and earn interest on the money in the account. The Sharpe ratio calculated using past performance can be compared on a fair basis to expected future performance of the fund.

• In mutual funds, it shows how much the fund’s returns deviate from its average returns.
• If you have a lower risk tolerance or are nearing retirement, low standard deviation funds may offer the stability you need.
• Upstox is a leading Indian financial services company that offers online trading and investment services in stocks, commodities, currencies, mutual funds, and more.
• Standard deviation in mutual funds tells you how much the fund’s returns fluctuate from its average.

As you can see, the alpha is not just the difference between the fund and its benchmark, which if true, the alpha would have been – Likewise, while beta gives us a perspective of the relative riskiness of an asset, it does not give us the absolute or the inherent risk of the asset itself. To put this in what is standard deviation in mutual fund context, think about it this way, Ferrari is faster compared to a BMW, this comparison is like the beta.

Example of Standard Deviation in Mutual Funds

Standard deviation in mutual funds measures volatility but has limitations. It treats positive and negative deviations equally, which can misrepresent risk. It assumes a normal distribution, though market returns are often skewed. Standard deviation helps investors understand the risk and volatility of mutual funds, enabling better comparison. It supports informed decisions by highlighting how much returns can fluctuate over time.