The Standard Deviation of a Mutual Fund Zacks

Forex Trading

The Standard Deviation of a Mutual Fund Zacks

It doesn’t give you any information about the fund’s inherent or absolute risk. Volatility is not the same as risk, but it is an anticipation or reaction to a risk event. A highly volatile fund poses greater risk to the investor than a fund with lower volatility. Volatility in the market provides the investors an impression that they are losing out on money, but that is not necessarily true.

  • A standard deviation in investing works by measuring how much returns tend to stray from the average.
  • It can be argued that since standard deviation is a correct measure of the volatility of a fund, it can help an investor stay away from funds with an aggressive management style and thus display a higher degree of volatility.
  • To help you for your money needs you can avail the facility of MoneyForLife Planner (‘MoneyForLife Planner/ Planner’).

While choosing a fund going by the standard deviation definition, you may use standard deviation as a measure of risk assessment in alignment with your own risk appetite and investment time frame. 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. 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. Mathematically, you can arrive at the Sharpe ratio by calculating the difference between the return of the fund and the return that you can earn from a risk-free investment, divided by the fund’s standard deviation.

What is Considered a Good Standard Deviation in Mutual Funds?

A scheme with a high standard deviation means that the mutual fund has high volatility. In other words, investors of a scheme with a high standard deviation is likely to  face higher fluctuations in its returns. These figures can be difficult to understand, so if you use them, it is important to know what they mean. Conservative investors who wish to preserve capital should focus on securities and fund portfolios with low betas while investors willing to take on more risk in search of higher returns should look for high beta investments. Beta, also known as the beta coefficient, is a measure of the volatility, or systematic risk, of a security or a portfolio, compared to the market as a whole.

It has an expense ratio of 0.07% compared to the category average of 0.80%. Looking at the fund from a cost perspective, VSGAX is actually cheaper than its peers. Information ratio compares the risk-adjusted returns of a mutual fund portfolio to its benchmark. The purpose of this ratio is to show excess returns relative to the benchmark, as well as the consistency with which excess returns are generated. You can decide whether or not to include a mutual fund in your investment portfolio based on its beta value. Risk-averse investors should ideally choose funds with a beta less than 1, while risk-takers can pick funds with a high beta (greater than 1).

What is considered as a Good Sharpe Ratio?

This fund would also exhibit a high standard deviation because each year, the return of the fund differs from the mean return. This fund is, therefore, riskier because it fluctuates widely between negative and positive returns within a short period. Mutual fund investors should avoid actively managed funds with high R-squared ratios, which are generally criticized by analysts as being “closet” index funds.

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The greater the standard deviation of securities, the greater the variance between each price and the mean, which shows a larger price range. For example, a volatile stock has a high standard deviation, while the deviation of a stable blue-chip stock is usually rather low. Another potential drawback of relying on standard deviation is that it assumes a bell-shaped distribution of data values.

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Ways to Measure Mutual Fund Risk

In terms of the information Technology Act, 2000 (as amended from time to time), this document is an electronic record. Aditya Birla Capital (‘the Brand’) is the single brand for financial services business of Aditya Birla Group. Aditya Birla Capital Limited is the holding company of all financial services businesses. In this case, Fund B is a better choice because Fund B generates more return for every unit of risk undertaken.

Beta is calculated using regression analysis and it represents the tendency of an investment’s return to respond to movements in the market. Individual security and portfolio values are measured according to how they deviate from the market. MPT is a standard financial and academic methodology used to assess the performance of equity, fixed-income, and mutual fund investments by comparing them to market benchmarks. Standard deviation is important because it can help investors assess risk.

Is there any difference between mean deviation and standard deviation?

In such cases, it makes little sense to pay higher fees for professional management when you can get the same or better results from an index fund. A beta of 1.0 indicates that the investment’s price will move in lock-step with the market. A beta of less than 1.0 indicates that the investment will be less volatile than the market.

Instead, it compares the square of the differences, a subtle but notable difference from actual dispersion from the mean. Because many investment techniques are dependent on changing trends, being able to identify highly volatile stocks at a glance can be especially useful. One of the reasons for the widespread popularity of the standard deviation measurement is its consistency.

The standard deviation in mutual funds represents the fluctuation in the returns of a mutual fund from its average return. It provides insights into the fund’s volatility, indicating the level of risk involved. A higher standard deviation denotes more fluctuation and, consequently, higher risk. All investment decisions shall be taken by you in your sole discretion.

This measurement is useful because while one portfolio or security may generate higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater an investment’s Sharpe ratio, the better its risk-adjusted performance. On the other hand, one can expect aggressive growth funds to have a high standard deviation from relative stock indices, as their portfolio managers make aggressive bets to generate higher-than-average returns. It is important to note that standard deviation can only show the dispersion of annual returns for a mutual fund, which does not necessarily imply future consistency with this measurement.

No fee of whatsoever nature is to be charged for the use of this Website. I’d suggest you go through that entire chapter to understand the concept of standard deviation and volatility. This will help you not just in your MF investments, but also investments in stocks. Alpha is defined as the excess return of the mutual fund over the benchmark return, on a risk-adjusted basis. When you are looking at the Beta of a stock or an MF, it is very important to recognize the fact that the beta is a measure of relative risk, it tells us how risky the stock or MF is compared to its benchmark.

Information Ratio

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It is used to measure the distribution of the actual return from the mutual fund’s expected annual return. This Website may be linked to other websites (including those of ABC Companies) on the World Wide Web that are not under the control of or maintained by ABCL. Such links do not indicate any responsibility or endorsement on our part for the external website concerned, its contents or the links displayed on it. These links are provided only as a convenience, in order to help you find relevant websites, facilities and/or products that may be of interest to you, quickly and easily. It is your responsibility to decide whether any facilities and/or products available through any of these websites are suitable for your purposes. To conclude, alpha is the excess return of the fund over above the benchmark returns.

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