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What is Standard Deviation? Formula to Calculate Standard Deviation

Standard deviation can be defined as a statistical measurement of the volatility of a mutual fund scheme. It demonstrates the degree of variation from the simple average or arithmetic mean. One drawback of SD is that takes into account both negative and positive dispersion from the average.

Standard Deviation indicates the volatility of the fund’s returns. Higher standard deviation means higher variation in returns and vice versa. In technical terms, it is a dispersion of returns from the average over a period of time.

what is standard deviation in mutual fund

Calculate a fund’s monthly performance over a long period of time. Where Variance is the average of the squared deviations from mean returns. Sounds complex – if you use excel it’s very simple to calculate. The Facilities Provider, ABC Companies or any of its third party service providers and processor bank/merchants etc. shall not be deemed to have waived any of its/their rights or remedies hereunder, unless such waiver is in writing.

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In the formula for standard deviation, first, we calculate the mean of the data set by adding all the values in the data and dividing it by the number of data values. Kindly suggest if arbitrage funds are ok for earning high returns with low risk. A standard deviation that is close to zero indicates that the values are closer to the expected performance. The what is standard deviation in mutual fund higher the number is from zero, the more variance there is with regards to the expected performance. It can only show the distribution of annual returns but at no point does not imply the future consistency of the investment. Though it provides insight into the volatility of a particular mutual fund, there are some limitations of using Standard deviation.

what is standard deviation in mutual fund

This is only a matter of statistical convenience and works for most practical purposes. This is why small-cap and mid-cap stocks are considered riskier than large-cap ones. Their actual returns are more widely dispersed around expected returns.

For example, a mutual fund scheme with a standard deviation of 3 can only be considered better or worse than another with a standard deviation of 4 or 2. It indicates the percentage of fund returns that conform to the movements in the existing benchmark index. In principle, this method is the closest to alpha and beta ratios. The value 0 suggests that there is no percentage of funds in a portfolio reacts to movement in its respective benchmark index; whereas the value 1 represents that change in the benchmark index mirrors the movements in fund returns. It is used to measure the variation of a set of data from the mean or average. In the case of Mutual Funds, the standard deviation indicates the digression of Mutual Fund returns in different phases of the market from the average or mean as calculated prior.

“The Financial Literates” is a dream & mission to make Indians Financial Literate. Standard Deviation – Is the average deviation from the mean returns. It’s an indication of volatility i.e. deviation from mean returns. The Website specifically prohibits you from usage of any of its facilities in any countries or jurisdictions that do not corroborate to all stipulations of these Terms of Use. The Website is specifically for users in the territory of India.

Standard Deviation – What is Standard Deviation? Calculation, Limitations, & FAQs

It accepts no liability for any damages or losses, however caused, in connection with the use of, or on the reliance of its product or related services. The first time I came to know of Standard Deviation was through Feroze Aziz of Anandrathi, he used to come on money show by CNBCTV 18 and started talking of this concept. It was quite interesting, he along with Sumaira Abdi of Money Control. The show was an hit as people realised that there was something called SD in investing.

what is standard deviation in mutual fund

For mutual fund investors, while variance will indicate how far the returns are likely to be from the average returns, the standard deviation is a more useful tool to measure risk and therefore make an informed investment decision. In other words, standard deviation measures how to spread out each data point is from the mean. Alpha gives a measure of the risk adjusted performance of your investment.

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The information provided may therefore vary from information obtained from other sources or other market participants. Any reference to past performance in the information should not be taken as an indication of future performance. The information is dependent on various assumptions, individual preferences and other factors and thus, results or analyses cannot be construed to be entirely accurate and may not be suitable for all categories of users. Hence, they should not be solely relied on when making investment decisions.

The higher the standard deviation, the higher is the variance between the stock prices and the mean of the prices. The standard deviation of a volatile stock is high in comparison to a blue-chip whose standard deviation is low. Standard deviation is a statistical measure of the range of a fund’s performance.

  • But like most things in life, averages can be both good and bad.
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  • As you may notice below, the standard deviation of the DSP Small-Cap fund is the highest (18.81%), while that of its flexi cap fund (which is essentially a proxy for large-cap) is the lowest (17.24%).
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  • For example, if fund A’s risk appetite is higher than fund B’s, choose the one that is in agreement with your risk appetite.

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Standard deviation

A Beta ratio value of 1 indicates a lower risk and lower growth potential compared to ratios at par or above 1. For example, if an asset manager can reap a 10% return on a specific Mutual Fund against a benchmark index of 8%, his/her alpha ratio would be 2. Investors opt to invest as per the alpha ratio in Mutual Funds around 1.5.

What is side pocketing in mutual funds?

It does not mean anything unless compared to funds in the peer group. Price-earnings ratio or PER represents how much a single unit of a fund can earn and what price is to be paid for that unit. It is the ratio between the current price of a single unit of a fund and the earnings per share of it.

In other words, volatility in their returns is higher than large-cap. Beta reflects the fund risk in relation to the market as a whole. Beta of one means the volatility of the fund and the market are aligned. A Beta of less than one means that the fund’s returns are less volatile compared to the broader market. On the contrary, a Beta greater than one implies that the fund’s returns are more volatile relative to the broader market.

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