This does not necessarily mean that one dataset is more variable than the other, as the standard deviation is influenced by the mean. A dataset with a larger mean might have a larger standard deviation simply because the values themselves are larger, not because they are more spread out. In order to find the standard deviation of a multiple-asset portfolio, an investor would need to account for each fund’s correlation, as well as the standard deviation. In other words, volatility (standard deviation) of a portfolio is a function of how each fund in the portfolio moves in relation to each other fund in the portfolio. The standard deviation of 9.40 indicates that the fund’s returns would go up or down by this value from its mean.
The greater the fluctuation in value, the higher the coefficient of variation and, therefore, the more volatile the fund is. A standard deviation is a number (expressed as a percentage) that can be used to show how much the returns of a mutual fund scheme are likely to deviate from its average annual returns. When applied to historical returns over a period the standard deviation can be used as a tool to measure the volatility of a fund. However it is essential to understand that standard deviation works based on the law of averages and just like all other spheres of life averages can neither be good nor bad on their own. 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.
This fund carries a 5-year annualized total return of 9.04%, and is in the top third among its category peers. If you’re interested in shorter time frames, do not dismiss looking at the fund’s 3 -year annualized total return of 7.8%, which places it in the top third during this time-frame. MoneySense, Canada’s personal finance resource for more than 25 years, is owned by Ratehub Inc., but remains editorially independent. The editorial team works to provide accurate and up-to-date information, but details can change and mistakes could happen. We encourage readers to do their own research, practice critical thinking and compare their options, especially before making any financial decisions.
This additional layer of analysis helps investors determine whether a fund’s volatility aligns what is standard deviation in mutual fund with their investment objectives. In other words, it measures the degree to which a mutual fund’s returns deviate from its average return. The higher the standard deviation, the higher the variability in returns, and therefore, the higher the risk.
What are standard deviation and variance?
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. Choose the investment that matches your risk appetite, for instance, if fund A has a higher risk appetite than fund B. 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. Different types of mutual funds exhibit varying levels of standard deviation due to the nature of their underlying investments.
In mutual funds, standard deviation and variance are metrics used to assess volatility and risk. Standard deviation measures how much a fund’s returns deviate from its average returns, offering a gauge of investment risk. Variance, the square of standard deviation, also quantifies dispersion from the mean but is less commonly used because its units are squared. It gives insights into volatility and the risk level of a fund’s return.
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Bond funds also display distinct risk characteristics depending on the types of fixed-income securities they hold. Interest rate movements significantly impact bond prices, meaning funds with longer-duration bonds tend to have higher standard deviations than those holding short-term securities. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1988 it has more than doubled the S&P 500 with an average gain of +23.89% per year.
What is standard deviation in mutual funds and why is it important?
When it comes to investing, understanding the volatility of your mutual fund can help you make informed decisions. Standard deviation is the go-to metric for this it measures how much the returns of a mutual fund fluctuate compared to its average return. A mutual fund standard deviation is a percentage that shows how much a fund’s returns might vary from its average annual return. Analyzing the benchmark returns will measure the fund’s variability when calculating the standard deviation of mutual fund returns over periods.
- There are few more scientific formulas that help one to choose funds – we will be covering them at some later stage.
- Therefore many investors use the terms volatility and standard deviation interchangeably.
- In practice, the standard deviation is estimated using 3, 5 and 10 year trailing monthly returns.
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- If you’re seeking potentially high returns and have a high risk tolerance, you can invest in funds with a high standard deviation.
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Investors can find a mutual fund’s standard deviation in various fund documents and financial platforms. Fund prospectuses, fact sheets, and annual reports typically include this metric alongside other risk and performance indicators. Many investors use standard deviation as a risk measure for stocks, exchange-traded funds (ETFs), mutual funds and other investments. The standard deviation of the investment returns over a period of time measures how widely results fluctuated.
For example, a high standard deviation indicates greater variability in returns, implying higher risk, while a low standard deviation suggests consistency. This insight allows investors to align their choices with their risk appetite and financial goals. Standard deviation is a useful measure for evaluating and managing the risk of mutual fund investments. Considering this metric, alongside a fund’s objectives, past performance, and costs, can assist investors in making choices that align with their financial goals and risk tolerance. 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.
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For mutual funds, the standard deviation measures the variation of returns against a market index or another fund. The higher the variation, the higher the risk of investing in the fund. Standard deviation is important because it helps assess the volatility of investments, enabling better risk evaluation.
You should undertake extensive research using financial tools to choose the fund that best matches your risk tolerance. A lower deviation is better if you are a conservative investor and seek less volatility and risk. On the other hand, a high standard deviation may be acceptable for investors seeking higher returns despite the increased risk. These examples underline the value of the standard deviation in real-world financial and banking situations. By quantifying risk and variability, it allows finance professionals and banks to make better-informed decisions.
Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. A higher standard deviation means the chances of large fluctuations in a fund’s returns are higher, and it can lead to sharp price swings for an investment. Volatility does not necessarily mean large profits; it can lead to extreme losses too.
- The amount by which the returns of a mutual fund scheme are likely to depart from their average yearly returns can be stated as a figure (expressed as a percentage) known as the standard deviation.
- This means that while there is potential for higher returns, there is also a higher risk of losses.
- Furthermore, all the monthly standard deviation values are annualised and represented as a percentage.
- Alpha indicates how much value has been either added or subtracted by the fund manager’s investment call and Beta on the other hand marks how sensitive a fund can be to market movement.
Comparing standard deviations is a way to understand variability across different datasets or within subsets of a dataset. Standard deviation measures the degree to which individual data points in a dataset vary or ‘deviate’ from the mean, or average, of the data set. In other words, it gives a sense of how spread out the values in a dataset are.
Financial institutions gather various data points, such as the borrower’s income, existing debts and credit history. The standard variation of less than one indicates a low variation from the mean, whereas greater than one is indicative of a high degree of variation. However, it is to be remembered that it is not good or bad, but an indicator of the data spread. Our experts have identified 7 Zacks Rank #1 Strong Buy stocks poised for potential breakout in the coming weeks. It is important to note that the product’s returns may not reflect all its expenses. If you have been looking for Non US – Equity funds, a place to start could be Fidelity International Capital Appreciation (FIVFX Quick QuoteFIVFX – Free Report) .
Investing in financial markets are subject to market risks, and past performance does not guarantee future results. It is advisable to consult a qualified financial professional, review official documents, and verify information independently before making investment decisions. Understanding standard deviation allows you to gauge a fund’s volatility. For example, if a mutual fund has a standard deviation of 7% and an average return of 15%, the expected return range would be between 8% and 22%, showing a 7% deviation in either direction. Compared to debt plans, equity schemes have a higher standard deviation.
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. No, standard deviation should be used along with other measures like beta, alpha, and Sharpe ratio to get a comprehensive view of a mutual fund’s risk and performance. Standard deviation is a statistical measurement that shows how much variation there is from the arithmetic mean (simple average).