Standard deviation is a statistical value by which one can find as to how much a Mutual Fund has deviated from its average returns. It is one of the factors to be taken into account while selecting a Mutual Fund.
Meaning of Standard Deviation in Mutual Fund
Standard deviation is a way to measure returns of a Mutual Fund over a selected period of time in comparison to its average returns.It can be said that the Standard Deviation shows how much a fund deviates from its mean data.For example, if a fund has Standard Deviation as 25, it means it can deviate from the average towards either side, meaning, either higher or lower.Greater the Standard Deviation, more volatile is the Mutual Fund.
Use of Standard Deviation for Mutual fund selection
The Standard Deviation tells about the volatility of a Mutual Fund. A Mutual Fund with Standard Deviation of 15 is less volatile than other with Standard Deviation of 20.It should be noted that Standard Deviation should only be considered for comparisons with Mutual Funds which have a similar mandate or objective. For example, Standard Deviation of a Midcap Mutual Fund can’t be compared to that of an Index Mutual Fund.Standard Deviation will also differ for different time period.
Standard Deviation is an important means for selection of Mutual Fund by an investor, but, as always, it should not be used in isolation but in conjunction with other parameters.