To determine standard deviation, you can utilize the following formula. This tells us that even though the average score is the same for both classes, the scores in Class B are more spread out from the mean compared to Class A. Both classes have an average (mean) score of 95, but when we calculate the standard deviation for each class, we get about 7.9 for Class A and 20.6 for Class B. 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.
A low standard deviation indicates that the returns of the mutual fund are less volatile and therefore less risky. A high standard deviation indicates that the returns of the mutual fund are more volatile and therefore riskier. Standard deviation is expressed in the same units as the returns of the mutual fund, usually as a percentage. Though such instances are uncommon, it is possible for a fund with a low standard deviation to have financial losses because of subpar portfolio composition. It is common practice to use the trailing monthly returns of 3, 5, and 10 years to determine the standard deviation.
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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.
How often should I review the standard deviation of my mutual fund investments? Investors should review their mutual fund investments regularly, but there is no set timeframe. Depending on individual investment goals and risk tolerance, some investors may choose to review their investments on a quarterly or annual basis. A low standard deviation indicates that a mutual fund’s returns are relatively stable and close to the average.
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- Additionally, our Research team regularly reviews and monitors the portfolios and updates the portfolios, if required.
- The standard deviation of return will be higher in equity funds due to the stock market volatility.
- For those who want to track their investments more effectively and get access to many different mutual funds, the Rupeezy website is suitable.
- If you read something you feel is incorrect or misleading, please contact us.
- But keep in mind that standard deviation is most useful when analyzing the past performance of one mutual fund in isolation.
We also have plenty more on our site in what is standard deviation in mutual fund order to help you find the best possible fund for your portfolio. Make sure to check out /funds/mutual-funds for more information about the world of funds, and feel free to compare FIVFX to its peers as well for additional information. We have a full suite of tools on stocks that you can use to find the best choices for your portfolio too, no matter what kind of investor you are.
Comparing Standard Deviation
Standard deviation measures the risk but also limits investors from some assumptions. Hence, it may underestimate extreme event risks and does not differentiate upside from downside volatility. Reliance on standard deviation alone as a measure of risk is not advisable. Therefore, using this metric with other risk measures is essential for a more comprehensive analysis of mutual funds. While investing in a mutual fund we often look at returns as a parameter for assessment. Along with returns a fair assessment of risk can help you in making a prudent choice.
- When selecting a fund based on the standard deviation definition, you can use standard deviation to analyse risk following his risk tolerance and time horizon for investing.
- We also have plenty more on our site in order to help you find the best possible fund for your portfolio.
- However, Fund A has a standard deviation of 4%, while Fund B’s standard deviation is 10%.
- We have a full suite of tools on stocks that you can use to find the best choices for your portfolio too, no matter what kind of investor you are.
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This means the fund’s returns could potentially swing up to 18% or drop down to 6%. If a fund shows a low standard deviation over a longer term, like 4 to 6 years, it often suggests that the fund has been consistently reliable in delivering returns over that duration. Standard deviation measures the volatility of a mutual fund’s returns, helping investors understand how much the investment value is likely to fluctuate. Standard deviation of historical mutual fund performance is used by investors in an attempt to predict a range of returns for various mutual funds. But keep in mind that standard deviation is most useful when analyzing the past performance of one mutual fund in isolation. Investors holding several mutual funds cannot take the average standard deviation of their portfolio in order to calculate their portfolio’s expected volatility.
Also, merely knowing a fund’s standard deviation doesn’t tell the whole story; its real meaning comes into focus when compared to similar funds. A lone standard deviation number can leave you questioning whether it’s high or low risk, creating a sort of analytical limbo. Moreover, because standard deviation directly gauges a fund’s volatility, it can steer you clear of investments managed aggressively, which typically exhibit higher volatility levels. Lastly, to get a comprehensive view of a fund’s risk profile, it’s crucial to consider other metrics like the Sharpe ratio, beta, and alpha alongside standard deviation.
In practical terms, standard deviation helps investors compare multiple funds. For instance, if two funds offer similar average returns, the one with the lower standard deviation may potentially have fluctuations in its returns. The comparison allows investors to make more informed decisions about where to allocate their money based on their financial goals and risk appetite. Variance stands for the average of the squared differences about the mean.
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However, people calculate standard deviation when there is a normal distribution of data points. 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.
This means that the fund’s returns can deviate by 4% on the higher side (i.e., the fund will generate 19% of returns) or 4% on the lower side (i.e., the fund will generate 11% of returns). Investors should use standard deviation to gauge the risk level of mutual funds and choose those that match their risk tolerance and investment goals. 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. With such differences, investors can take an informed call on the types of investments they make per their given financial goals and risk profile. Based on the standard deviation of several assets, investors can combine different mutual funds to gain the best balance of risk and return.
Standard deviation measures how much the returns of a mutual fund are deviating from its average returns. Variance is the average of the squared differences between the fund’s returns. To better understand the concept of standard deviation, let’s use an illustrative example. Say a mutual fund has a standard deviation of 6 and an average annual return of 12%.
Essentially, mean deviation offers an average distance of each value from the centre, providing a different perspective on data dispersion. Furthermore, while you will solely arrive at a number using this specific deviation definition for risk calculation, there is always a problem as to whether it is low or high. For example, calculating mean deviation is more effective when there is a high dispersion level.