How Standard Deviation Helps Evaluate Mutual Fund Risk

A single mutual fund may have several share classes, for which larger investors pay lower fees. A mutual fund is an investment fund that pools money from many investors to purchase securities. The term is typically what is standard deviation in mutual fund used in the United States, Canada, and India, while similar structures across the globe include the SICAV in Europe (‘investment company with variable capital’), and the open-ended investment company (OEIC) in the UK. Still, standard deviation results depend on averages, which are not considered good or bad.

How does standard deviation help in portfolio management?

This basic insight makes a big difference when choosing between investment options. In this case, the standard deviation helps the bank understand how typical or atypical each piece of data is. Borrowers with data that is closer to the mean on all data points might be seen as less risky, given that they represent the ‘typical’ borrower. For a mutual fund, it shows how far the returns deviate from the expected returns based on its past performance. In general, debt funds which are potentially less risky as compared to equity funds tend to have lower standard deviation. While mean and standard deviation measures the extent of variation, standard variation is considered more effective when the data points are normally distributed.

Return Data Collection

• Hence looking at these ratios in conjunction with each other provides you with a broader picture and helps you make a more informed decision.
• Standard deviation in mutual funds tells you how much the fund’s returns fluctuate from its average.
• It is vital to bear in mind that despite all the advantages of standard deviation using it alone as a risk assessment tool can have its limitations.
• However, funds in different categories naturally exhibit different levels of volatility, making direct comparisons most meaningful within the same asset class.

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What is Standard Deviation in Mutual Funds?

Suppose Arun has invested in a mutual fund with a standard deviation of 4% and average returns of 15%. 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). A standard deviation refers to a statistical tool for measuring the deviation of portfolio returns from their mean. When investing in market-linked instruments, it is a crucial metric to consider. A standard deviation is a statistical tool that helps measure the deviation in portfolio returns from its average. The standard deviation has wide use in determining the risk of an investment.

The context in which these fluctuations occur is just as important as their magnitude. A high standard deviation during a period of market expansion could indicate aggressive positioning, whereas the same level of volatility in a downturn might suggest excessive risk exposure. Sector-specific funds, such as technology or healthcare funds, can experience pronounced volatility due to industry trends, regulatory changes, or innovation cycles. A technology fund may see sharp price movements based on earnings reports, new product launches, or shifts in investor sentiment toward growth stocks. On the other hand, utility funds, which invest in companies providing essential services like electricity and water, typically have more stable returns due to consistent demand and regulated pricing structures.

Do You Need a Demat Account for Mutual Funds?

Index funds are a type of mutual fund which just passively tracks an index like the Nasdaq-100 while actively managed funds charge higher fees as they try to beat a benchmark. In 1936, U.S. mutual fund industry was nearly half as large as closed-end investment trusts. But mutual funds had grown to twice as large as closed-end funds by 1947; growth would accelerate to ten times as much by 1959. The information (and opinions, if any) contained on the Website may have been obtained from public sources believed to be reliable and numerous factors may affect the information provided, which may or may not have been taken into account. The information provided may therefore vary (significantly) 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.

• Funds that are managed by the same company under the same brand are known as a fund family or fund complex.
• Standard deviation is a statistical tool that provides information about a financial instrument’s underlying volatility or risk.
• Kindly, read the Advisory Guidelines for investors as prescribed by the exchange with reference to their circular dated 27th August, 2021 regarding investor awareness and safeguarding client’s assets.
• It may be used alongside other metrics like beta or Sharpe ratio for a more comprehensive evaluation of a fund.
• This comparison helps in constructing a diversified investment portfolio that aligns with an investor’s.

However, Fund A has a standard deviation of 4%, while Fund B’s standard deviation is 10%. This suggests that returns for Fund A are more predictable and less volatile than Fund B. Therefore, conservative investors, who prioritise steady returns over high gains, might prefer Fund A due to its lower risk. You can use this metric to identify funds that align with your risk profile. If you’re seeking potentially high returns and have a high risk tolerance, you can invest in funds with a high standard deviation. Alternatively, if you have a low risk appetite and wish to invest in funds with stable returns, you can consider investing in funds with a low standard deviation. Standard deviation is a statistical tool that provides information about a financial instrument’s underlying volatility or risk.

Some platforms also break down standard deviation by different market conditions, showing how a fund performed during bull and bear markets. This additional layer of analysis helps investors determine whether a fund’s volatility aligns with their investment objectives. Equity funds are mutual funds investing in stocks with the goal of appreciating capital. These funds are often distinguished by growth or value focus, by investing in particular sectors of the stock market, or investing in particularly-sized companies.

A low Sharpe ratio suggests that the fund’s fluctuations have not translated into meaningful excess returns, potentially making it less attractive for risk-averse investors. Analyzing past performance helps investors understand a fund’s risk profile and consistency. While short-term movements can be influenced by temporary market disruptions, a long-term dataset reveals patterns that may not be immediately obvious.

Front-end and back-end loads, securities transaction fees, and shareholder transaction fees are normally excluded. Hybrid funds may be structured as fund of funds, meaning that they invest by buying shares in other mutual funds that invest in securities. Many funds of funds invest in affiliated funds (meaning mutual funds managed by the same fund sponsor), although some invest in unaffiliated funds (i.e., managed by other fund sponsors) or some combination of the two.

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He has covered ULIPs, mutual funds, and retirement plans across fintech firms and insurers like Axis Max Life. Next, research available funds in either the brokerage’s research tools or a third-party tool like Yahoo Finance or Morningstar, including how the fund performs against benchmarks, what fees are charged and what the fund’s portfolio is made up of. Read through the fund’s prospectus to make sure it aligns with your investment objectives and see if there are any better mutual funds available. Choosing the right account to invest in your mutual fund will be tied to your investment goals. For example, if you’re saving for a home, you should invest through a taxable brokerage account but if you’re investing for retirement, you should invest in your 401(k) or IRA. If you’re investing for a child’s college savings, you should choose a 529 plan and if you’re saving for future health costs, invest through your HSA.