A reasonable estimate of risk and returns can aid you in making a wise decision. The standard deviation statistical tool can be used to evaluate risks and volatility. This deviation is a crucial ratio typically utilised by fund managers that benefit investors. To better assist you in evaluating risk, let’s explore the standard deviation. Standard deviation measures the risk but also limits investors from some assumptions.

Beta Ratio

It operates under RKSV Securities and is registered with SEBI, NSE, BSE, and other regulatory bodies, ensuring secure and compliant trading experiences. It demonstrates for a mutual fund how far the returns depart from the returns predicted based on its prior performance. For instance, an equity fund with a standard deviation of 15% would depict a significant risk and reward. The conservative bond fund may have a standard deviation of only 4%, showing stability with reduced returns.

This plan allows policyholders to choose from various equity, debt and hybrid funds while also retaining the option to make fund switches during the policy term without any limitation. Additional benefits of this plan include the in-built life cover benefit as well as tax-free maturity payout as per provisions specified u/s Section 10(10D) of the Income Tax Act, 1961. He assumes the role of CEO and his job is to help the team get their job done. Vineet drives the growth strategy and its execution through product innovation, product marketing and brand building.

This means that, on average, the annual returns of this hypothetical Indian equity mutual fund deviate from the mean annual return by about 2.87 percentage points. In the context of mutual funds in the Indian market, this standard deviation figure helps investors understand the volatility of the fund. In mutual funds, standard deviation and variance are metrics used to assess volatility and risk. Standard deviation measures how much a fund’s returns deviate from its average returns, offering a gauge of investment risk.

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The essence of standard deviation lies in its ability to measure risk. It provides a numerical value that helps investors understand the amount of uncertainty or risk involved in an investment option. A higher standard deviation indicates greater volatility, meaning the investment’s returns can vary widely from the average return.

One of the reasons for the widespread popularity of the standard deviation measurement is its consistency. Though both mean and standard deviation aim to quantify data variability, standard deviation is often more accurate when the data follows a normal distribution. On the other hand, mean deviation can be more insightful when there’s a higher level of data scattering. Essentially, mean deviation offers an average distance of each value from the centre, providing a different perspective on data dispersion.

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

Sannihitha Ponaka is an MBA graduate from Symbiosis and has more than 5 years of experience in the financial sector. Following her dreams in the field of finance, she leverages writing to communicate the importance of investing. Your go-to guide to creating amazing and easily understood investment content. Her forte lies in investment advisory and strategy with expertise in fundamental analysis and research. In practice, the standard deviation is estimated using 3, 5 and 10 year trailing monthly returns. Furthermore, all the monthly standard deviation values are annualised and represented as a percentage.

Diversification of Portfolios

Variance is the average difference from each point to the mean. Every value is expressed as a percentage, making it easier to compare the relative volatility of several mutual funds. For a given data set, standard deviation measures how spread out the numbers are from an average value. This measurement of average variance has a prominent place in many fields related to statistics, economics, accounting, and finance. In investing, it can be used to measure the volatility of an investment or investment portfolio.

Another potential drawback of relying on standard deviation is that it assumes a bell-shaped distribution of data values. This means the equation indicates that the same probability exists for achieving values above the mean or below the mean. Many portfolios do not display this tendency, and hedge funds especially tend to be skewed in one direction or another.

If the portfolio has several funds, then standard deviation cannot provide any comparable results. In debt funds, Gilt funds and Income funds have higher volatility (by extension, higher standard deviation) than Liquid funds. Measuring standard deviation will help the investors see how consistent the rate of return has been over a time period. In other words, it is a measure of how much deviation occurs from the expected return of the instrument in question. The words volatility and standard deviation are used what is standard deviation in mutual fund interchangeably.

• A good standard deviation of returns is relative and depends on individual risk tolerance; however, a lower standard deviation is generally preferred as it indicates less volatility.
• A standard deviation is a statistical tool that helps measure the deviation in portfolio returns from its average.
• 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.
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• A lower value indicates stability, while a higher one signals volatility.
• Team of expert writers dedicated to providing insightful and comprehensive coverage on stock markets, economic trends, commodities, business developments, and personal finance.

So, if an investor is looking at this mutual fund, they can understand that the returns they might get could be as low as 5% or as high as 15%. This information helps investors decide if this fund fits well with the level of risk they are comfortable with and whether it meets their investment objectives. In addition to evaluating the standard deviation of a mutual fund, it is also important to evaluate the risk tolerance of the investor. Some investors may be comfortable with higher levels of risk, while others may prefer a more conservative approach.

• But like most things in life, averages can be both good and bad.
• You must compare a fund’s standard deviation to other schemes in the same category to determine whether it is high or low.
• In contrast, investors who can afford higher risk for potential returns may prefer funds that have a larger standard deviation.
• Simply averaging out the standard deviations, is no answer to understanding the market volatility of the portfolio.

In simple words, it tells you how consistent the returns of a mutual fund have been over time. In this blog, we discuss what standard deviation is in mutual funds and how investors can use this measure to make wise investment decisions. In mutual funds, it shows how much the fund’s returns deviate from its average returns.

If, for instance, a mutual fund scheme has a standard deviation of 4 while its expected return is 15%- it tells us that the fund’s return can vary on either side (+4 or -4). Assume that a large-cap mutual fund has given an annual return of 12%, whereas Sensex has offered 10%. That means the fund manager has outperformed the benchmark by 2%. However, various mutual funds on hand make it complicated to pick out the right one. So far we have discussed what is alpha and beta in mutual fund, let us see how alpha and beta in mutual fund are calculated. Alpha and beta, along with these ratios draw a complete picture of a fund or portfolio’s history and forecasts solid grounds to make future predictions.