Standard Deviation

Standard deviation is a measure of total risks of a fund. In other words it measures the volatility of returns of a fund. Standard Deviation is a measure of how much the actual performance of a fund over a period of time deviates from the average performance. It indicates the tendency of the funds NAV to rise and fall in a short period. It measures the extent to which the NAV fluctuates as compared to the average returns during a period.

A fund that has a consistent four –year return of 3% for example would have a mean or average, of 3%. The standard deviation for this fund would then be zero because the fund's return in any given year does not differ from its four year mean of 3%. On the other hand, a fund that in each of the last four years returned -5%, 17%, 2%, and 30% will have a mean return of 11%. The fund will also exhibit a high standard deviation because each year the return of the fund differs from the mean return. The fund is therefore more risky because it fluctuates widely between negative and positive returns within a shorter period. A higher standard deviation means that the returns of the fund have been more volatile than a fund having low standard deviation. In other words high standard deviation means high risk.

Since Standard Deviation is a measure of risk, a low Standard Deviation is good.