Standard deviation in mutual fund performance

Standard deviation measures the volatility of a mutual fund’s returns, indicating the typical deviation of returns from the average. Higher standard deviation = higher volatility = higher uncertainty in outcomes.

Annualised standard deviation

For mutual fund analysis, returns are typically annualised:

• Monthly returns are computed and annualised by multiplying by √12.
• The annualised standard deviation indicates the typical year-to-year variation.

Typical ranges by fund category

Interpretation

One standard deviation rule

Approximately 68% of returns fall within ±1 standard deviation of the mean. For an equity fund with:

• Average return: 12% per year.
• Standard deviation: 20%.

Approximately 68% of yearly returns fall between -8% and +32%.

Two standard deviations

Approximately 95% of returns fall within ±2 standard deviations.

For the same fund: 95% of returns between -28% and +52%.

Limitations

• Assumes normal distribution: Real returns have fat tails.
• Symmetric volatility measure: Treats upside and downside the same.
• Period-dependent: Can vary materially with measurement window.

The Sortino ratio uses downside-only deviation as a more intuitive risk measure.

Use in mutual fund evaluation

Standard deviation should be compared within same scheme category:

• Compare large-cap-vs-large-cap.
• Avoid cross-category comparison.

For investors with specific risk tolerance:

• Low risk tolerance: Prefer schemes with lower std dev.
• High risk tolerance: Higher std dev acceptable for higher expected return.

See also

• Mutual funds in India
• Sharpe ratio
• Sortino ratio
• Beta mutual fund
• Alpha mutual fund
• Max drawdown
• Downside upside capture
• Tracking error
• R-squared

External references

• SEBI
• AMFI India

References

1. CFA Institute curriculum on portfolio analytics.
2. Statistical literature on standard deviation in finance.