Standard Deviation in Mutual Funds Formula and Calculation

This indicates higher risk and more volatility in its performance. It’s suitable for investors who can handle more risk and are looking for higher potential returns. In portfolio construction, standard deviation aids in identifying the right balance between risk and return. For example, a portfolio heavily weighted in high-standard deviation assets may offer higher returns but also exposes investors to significant volatility. Conversely, a portfolio composed of low-standard deviation assets tends to be more stable but may generate lower returns. Understanding standard deviation allows you to gauge a fund’s volatility.

Formula to Calculating Standard Deviation in Mutual Funds

One drawback of SD is that takes into account both negative and positive dispersion from the average. This means that returns that are above average will increase the SD the same way as returns that are below the average. The standard deviation tends to be lower over a longer period of time as compared to shorter time periods. The concept of Standard Deviation becomes important when you invest in a market-linked product like mutual fund.

• Alpha helps overcome the limitations of the standard deviation metric.
• In addition to returns, a reasonable risk assessment will assist you in making prudent decisions.
• To put this in context, think about it this way, Ferrari is faster compared to a BMW, this comparison is like the beta.

For instance, if two funds have similar average returns, the one with the lower standard deviation is generally considered less risky and thus more attractive for risk-averse investors. When building a portfolio, investors often aim to diversify their holdings to spread risk across different assets or asset classes. By including mutual funds with varying standard deviations, investors can balance the overall risk of the portfolio. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully.

The standard deviation provides investment insight into the fund’s historical performance and the uncertainty of future returns. Variance stands for the average of the squared differences about the mean. The variance can be calculated by getting the difference of each point from the mean. In other words, standard deviation measures how to spread out each data point from the mean.

How To Calculate Standard Deviation In Mutual Funds

Conservative investors may want to avoid such funds, while aggressive investors might prefer them for their potential high returns. A higher standard deviation implies a higher variation in returns, and a lower value indicates a lower range. Compared to debt plans, equity schemes have a higher standard deviation. A larger number of the standard deviation denotes a wider range of returns, whereas a smaller value denotes a narrower range.

Comparing Mutual Funds

Standard deviation is a good measure of market volatility and the response of the mutual fund to this volatility. As far as SD in funds depends on how much risk you can take in. Check the metric with other investments in the same category to understand the performance. According to your risk tolerance, you can decide if the number is acceptable for you and if it matches your investment goals. If you’re wondering how to calculate the standard deviation of mutual funds in Excel?

• The standard deviation of return will be higher in equity funds due to the stock market volatility.
• In mutual funds, standard deviation and variance are metrics used to assess volatility and risk.
• One of the common ways that investors use to measure the risk of a mutual fund is standard deviation.
• Beta is also a significant factor when gauging the Capital Asset Pricing Mode or CAPM.

Standard Deviation is the square root of variance, which measures the average squared deviations from the mean. Bollinger Bands have several limitations, such as the fact that they are calculated using a simple moving average that weighs older price data in the same way as newer data. They should be used with other technical indicators to get a more complete picture of market behavior. The more securities held in a portfolio, and the more variety of types of securities, the less each individual security and its standard deviation matter to the whole portfolio. Even the most range-bound charts experience brief spurts of volatility from time to time, often after earnings reports or product announcements.

Example: Calculating Standard Deviation in Mutual Funds

Standard deviation is used to measure variation from arithmetic mean generally. But in finance, standard deviation refers to a statistical measure or tool that represents the volatility or risk in a market instrument such as stocks, what is standard deviation in mutual fund mutual funds etc. Standard deviation is important because it gives a number to the level of risk and volatility in mutual fund returns.

Most financial websites and mutual fund platforms display the standard deviation of a fund over various periods (e.g., 1 year, 5 years). It is a key measure of risk that helps investors understand the volatility of their investments. It is most effective when used alongside other statistical measures, such as the mean, variance, and correlation, to gain a comprehensive understanding of investment performance and risk.

It is an effective way of measuring the degree of risk and volatility of a mutual fund scheme. Suppose the standard deviation of a mutual fund comes out to 3%, and the average annual return of the same is 15%. In such a scenario, the expected returns could be in the range of 12-18%.

The “Average” Standard Deviation: A Spectrum of Volatility

In other words, returns of funds with a high standard deviation may fluctuate either on the higher or lower side of the average and may be said to lack consistency. The Bajaj Finserv Mutual Fund Platform has more than 1,000 mutual fund schemes, allowing for easy mutual fund comparison and selection. Volatility measures how quickly the price of a security fluctuates relative to its returns. It reflects the risk linked to price changes and is quantified by computing the standard deviation of annualized returns during a specified timeframe. Using these mutual fund metrics can help you understand where you should allocate your funds, thereby lowering the risk of losing your hard earned money.

It ensures smooth transactions while earning higher FD interest on surplus money. Funds are withdrawn in small units from the latest FD first, offering flexibility, better returns, and uninterrupted access to your money without extra charges. Though it provides insight into the volatility of a particular mutual fund, there are some limitations of using Standard deviation. Beta, on the other hand, is used to quantify the fund’s response to market volatility. It is a representation of the relative risk of the fund and not the inherent risk of investing in that particular fund.

This measure of risk along with others measures of investment performance like alpha and beta, Sharpe Ratio and Sortino are the key tools that investors use to choose investments. In this blog, we will discuss various aspects of standard deviation in mutual funds, like its meaning, importance, calculations and interpretation. It is usually used to quantify the mutual fund’s response to market volatility and is considered to be a representation of the relative risk of the fund.