What is Standard Deviation and how to interpret it?

He used to ask the investor to grill the fund managers on these concepts. The blog posts/articles on our website are purely the author’s personal opinion. The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a professional financial or tax advisor.

Let’s further assume that BSE Sensex that has given a return of 20% in a specific year. If the given value of alpha is positive 2.0, then it means that XYZ has outperformed its benchmark index by 2% and given 22% as returns for that specific year. Similarly, a negative alpha of 2.0 may mean that XYZ has underperformed compared to BSE Sensex and given 18% as returns for the specific year. If an individual prefers higher returns over low risks, he/she can invest in funds with a beta in Mutual Funds lower than 1.

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They can be trustworthy, or they can be worthless, or they can be anywhere between the two. For example, the average age of children in a nursery school is three years. You could walk into a kindergarten expecting most kids to be more or less three years old and you would not be wrong. You could walk into a school expecting most students to be more or less 12 years old and you would be almost completely wrong. Around 90 percent of the students would NOT be 12 years old — they would be all ages from 5 to 18 years.

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Standard deviation shows the deviation of the fund returns around mean. It takes into account both the upside risk as well as the downside risk as it factors both the positive as well as the negative deviation of returns around mean. As one can see from the above table the schemes with the lowest standard deviation does not give the best returns. So standard deviation should be seen along with the returns generated by the scheme. Standard Deviation also varies greatly as per the category of the scheme. Please note that your stock broker has to return the credit balance lying with them, within three working days in case you have not done any transaction within last 30 calendar days.

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Demonstrates Expected Volatility Range

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Although these predictions might vary from actual results, it still provides a significant picture to the prospective investor for his/her decision. More than 86,200 of your industry peers are staying on top of their game by receiving daily tips, ideas and articles on growth strategies. Join them and stay updated by subscribing to Cafemutual newsletters. Any disagreements or criticisms must be expressed in a dignified manner.

Your Acceptance of the Terms of Use contained herein constitutes the Agreement for the Purpose as defined hereunder. Is owned by Aditya Birla Management Corporation Private Limited and the same is used herein under the License by Aditya Birla Capital Limited and its subsidiary companies (collectively hereinafter referred to as “ABC Companies”). Aditya Birla Capital Limited is the holding company of all financial services businesses. Use the square root value of the variance calculated in the 2nd point to calculate the standard deviation. All efforts have been made to ensure the information provided here is accurate. Please verify with scheme information document before making any investment.

• This will not only give you a better understanding of risk and volatility, but also help you choose a better fund when you are looking at various mutual fund offer documents.
• Within debt funds, the SD of Liquid Fund will be lower in comparison to Dynamic Bond Fund which takes duration bet, or Gilt Fund which is susceptible to interest rate risk.
• Bollinger bands is a technical analysis tool designed to discover probabilities of when an asset is oversold or overbought.
• This is only a matter of statistical convenience and works for most practical purposes.

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The standard deviation allows you to measure the variability in the performance of a mutual fund. WIth this, you can take a more informed decision regarding the funds you want to invest in. If you are really serious about fund analysis, you need to understand this is all about judging returns and risk. Stripped of a lot of complexity, this task involves determining a fund’s average performance over a period of time. Let’s get down to basics and take a refresher course on this concept.

How to read this figure?

Again, it is not to say that Nippon India Large Cap’s standard deviation is not favorable. As an investor, you can take a call depending on your return expectations and risk appetite. Beta denotes the sensitivity of the mutual fund towards market movements.

Overnight funds, which invest most of their assets in the government’s treasury bills (short-term instruments spanning 90 to 182 days), money market funds, or ultra-short duration funds – all of these have low risk. Most overnight funds have had a 3-yr compounded growth rate of less than 4% as they invest in safe assets. On the other hand, most thematic or sectoral funds and small-cap funds have a higher standard deviation.

Measuring Mutual Fund Risk

Aditya Birla Capital is the brand and accordingly all products and facilities are provided by respective ABC Companies as applicable. A standard deviation is a statistical what is standard deviation in mutual fund 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.

Volatility in the market provides the investors an impression that they are losing out on money, but that is not necessarily true. Being reactionary to the volatility in the market can prove to be detrimental to the investors interest in the longer run. Market volatility is usually measured with the help of beta ratio and standard deviation.

For more details, please also refer to the Legal Disclaimers provided on the Website. You cannot decide if the standard deviation of a fund is high or low unless you compare it to other schemes in the same category. Low-risk schemes such as debt mutual funds tend to have a low standard deviation. While funds in the equity category will have a higher standard deviation in comparison to the debt category.

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Please note that in case of default of a Member, claim for funds and securities, without any transaction on the exchange will not be accepted by the relevant Committee of the Exchange as per the approved norms. 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. An equity category – mid cap fund or a sectoral fund or a multi cap fund usually has a higher standard deviation in comparison with large-cap or balanced funds. It is used to measure the distribution of the actual return from the mutual fund’s expected annual return. The square of each of these numbers must be added and the result must be divided by the total number of data points minus 1.