What is standard deviation in a mutual fund?


#1

What is standard deviation in a mutual fund?


#2

Standard deviation or SD is an important factor that must be looked in detail before approving or rejecting any mutual fund. In simple terms, Standard deviation is the amount of return each fund gives compared to expected returns based on the fund’s history. For example a fund with standard deviation of 10% has a tendency to deviate 10% from its average return. A fund with lower SD is better for the investor in the long run as it is likely to deviate less from its expected return.


#3

I am 65 year old retired individual and need to invest some money in a safe investment vehicle. Are liquid funds a good option for senior citizens?


#4

Yes liquid funds are safe and offer a foolproof investment making it ideal for post retirement investment since they invest in government bonds and treasury bills etc. Since liquid funds do not have a lock-in period and invests in securities with a maturity period of up to 91 days, liquid funds are better off than investing in other equity based mutual funds. The fact that liquid funds come with no exit load, the money can be easily withdrawn if needed due to any financial emergency.


#5

Hi Vichu,

Standard deviation is a tool which helps measure the total risk that is associated with a fund. It helps to measure the extent to which the fund’s returns vary across its average returns. These returns can be calculated by a change in the percentage of the net asset value (NAV), which can be calculated over different time frames varying from daily, weekly, monthly, quarterly, or annual periods. If the standard deviation is high, then it signifies that your periodic returns are undergoing fluctuation, thereby signifying risks involved in the investment. Low standard deviation indicates that your periodic returns are undergoing fluctuations that are closer to the expected average returns, thereby implying a lower probability of loss on your investments. Hope this helps!

Cheers,
BB Expert