Understanding the standard deviation helps investors make better, more rational choices as it ensures their portfolios are in sync with the risks for their investment plans. While it is a useful tool for assessing risk and comparing funds, it is essential to consider its limitations and use it with other measures for a comprehensive investment strategy. When a mutual fund exhibits a high standard deviation, it indicates that its returns have historically fluctuated significantly from the average returns. This means that while there is potential for higher returns, there is also a higher risk of losses. Conversely, a low standard deviation signifies less fluctuation, making such funds potentially less risky but also possibly offering lower returns.

Standard deviation (σ) is an investing metric used to measure the variation of data points around the mean (average) of a data set. When data points are clustered closely around the mean, standard deviation is low. To calculate standard deviation, we need to first calculate the mean return of the mutual fund.

Using the statistical instrument standard deviation is one method for evaluating risks and volatility. The standard deviation, a ratio commonly used by fund managers, is of significant help to investors. Let’s understand standard deviation and how it can help you assess risk more accurately. Standard deviation can greatly help in comparing equity funds with debt funds.

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Another limitation of standard deviation is that it does not differentiate between positive and negative deviations from the mean. As such, a mutual fund with high positive deviations may have the same standard deviation as a fund with high negative deviations. However, investors may have different preferences for positive versus negative deviations and should take this into consideration when evaluating mutual funds.

These returns cover a period from January 1, 1988 through March 3, 2025. A simple, equally-weighted average return of all Zacks Rank stocks is calculated to determine the monthly return. The monthly returns are then compounded to arrive at the annual return. Only Zacks Rank stocks included in Zacks hypothetical portfolios at the beginning of each month are included in the return calculations. Certain Zacks Rank stocks for which no month-end price was available, pricing information was not collected, or for certain other reasons have been excluded from these return calculations.

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When comparing standard deviations, it is crucial to consider the context. Comparing the standard deviations of datasets with similar means can give a good sense of which dataset is more variable. Similarly, comparing the standard deviations of subsets within a dataset can reveal whether some subsets are more variable than others. If you are comparing two datasets with different means, you might find that one has a higher standard deviation than the other.

• This tells us that even though the average score is the same for both classes, the scores in Class B are more spread out from the mean compared to Class A.
• This means the fund’s returns could potentially swing up to 18% or drop down to 6%.
• A higher standard deviation suggests wider fluctuations, while a lower one implies more stable performance.
• Independent financial research firms like Morningstar, Lipper, and Bloomberg also provide standard deviation data, often in comparison to category averages and benchmarks.
• The standard deviation of FIVFX over the past three years is 19.93% compared to the category average of 19.64%.
• The last step is taking the square root of the variance to restore the metric to its original percentage scale.

Standard Deviation in Mutual Funds: Meaning, Calculation and More Details

Standard deviation is an important measure that helps rank mutual funds concerning risk and return. By measuring how much a fund’s returns deviate from its average, standard deviation helps investors gauge the consistency and reliability of a fund’s performance. A lower standard deviation in mutual funds indicates more stable returns, while a higher standard deviation points to greater variability and potential risk.

How Can Investors Use Standard Deviation to Choose Mutual Funds?

Investors who are willing to tolerate a higher level of risk may choose mutual funds with higher standard deviation in the hopes of achieving higher returns. Conversely, investors who prefer lower risk may choose mutual funds with lower standard deviation. In addition to evaluating the standard deviation of a mutual fund, it is also important to evaluate the risk tolerance of the investor.

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However, such a relationship does not always have to be linear; some funds may have high returns with moderate risks, and others might present big risks without promising high returns. A standard deviation is a statistical measure that shows the range or spread of a set of values. It is commonly used in finance to determine the deviation of individual data points from the mean of a dataset.

In actuality, 3, 5, and 10-year trailing monthly returns are used to assess the standard deviation. All monthly standard deviation measurements are additionally annualised and displayed as a percentage. A fund with a high standard deviation portrays a higher degree of variation from the mean. Conversely, a lower standard deviation signifies that the returns are more clustered around the average, implying lower volatility and risk. Our research team spends 1400+ hours researching, analyzing, and curating the best-suited mutual fund for your financial goals by making use of both qualitative and quantitative factors.

What is The Importance Of Standard Deviation in Mutual Funds?

Be sure to review product information as well as provider terms and conditions on their sites. (Products and offers may vary for Quebec.) The content provided on our site is for information only; it is not meant to replace advice from a professional. Investors use standard deviation as a way to gauge how widely investment returns have varied historically. Learn how investors use standard deviation in the MoneySense Glossary.

• Different types of mutual funds exhibit varying levels of standard deviation due to the nature of their underlying investments.
• A fund that has experienced frequent sharp declines over multiple years signals a history of instability, whereas one with steady returns across different market cycles suggests resilience.
• To better assist you in evaluating risk, let’s explore the standard deviation.
• Over the past 5 years, the standard deviation of the fund is 19.27% compared to the category average of 19.73%.
• Fees charged by investment advisors have not been taken into considiration.

How to Calculate Standard Deviation of Mutual Funds?

In practice, the standard deviation is estimated using 3, 5 and 10 year trailing monthly returns. Furthermore, all the monthly standard deviation values are annualised and represented as a percentage. For a mutual fund, it shows how far the returns deviate from the expected returns based on its past performance. While there is no such thing as a good or bad standard deviation, funds with a low standard deviation in the range of 1- 10, may be considered less prone to volatility.

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When a fund manager makes an investment decision, Alpha shows how much value has been created or removed, and Beta shows how sensitive. Also you can search about standard deviation formula to know the actual details. Though the standard deviation is an important measurement for mutual fund-related investment decisions, still like every other metric, standard deviation also has certain limitations. Analysing the standard deviations of various funds can help investors combine asset classes with different levels of volatility to create a more balanced portfolio. In simple terms, a greater standard deviation indicates higher volatility, which means the mutual fund’s performance fluctuated high above the average but also significantly below it.

As an illustration, a mutual fund strategy with a 3-standard deviation. Assessing standard deviation in mutual funds allows you to understand the volatility of a fund. It helps you choose a fund whose risk levels you are comfortable with, contributing to better investment decisions. However, you must consider the fact that standard deviation also has some limitations as well. In statistics, the standard deviation measures the amount of variation for a set of data.