What is Standard Deviation in Mutual Funds?

Standard Deviation in mutual funds tells you how volatile a fund’s returns are. Learn this key risk metric in plain English — with real-life examples.

23/06/2025

Introduction

Ever noticed two funds with the same returns — but one feels riskier? That’s where Standard Deviation (SD) steps in.

It measures how wildly a fund's returns fluctuate from its average. In simple words: higher SD = higher mood swings in returns.

What Is Standard Deviation (SD)?

SD tells you how much a fund's returns deviate from the average (mean).

🧮 Example:

If a fund’s 5-year average return is 10%, and the SD is 5%,
the returns might vary between 5% to 15% most of the time.

✅ Why It Matters?

Low SD = Predictable, stable fund
High SD = Unpredictable, risky fund

🔍 SD is used in Sharpe Ratio to adjust return for risk. Real-Life Example: Meena vs Varun

Meena picked Fund A: 10% returns, SD of 4
Varun picked Fund B: 10% returns, SD of 9

Both expected similar profits — but Fund B’s ride was bumpy, with deep dips and spikes. Meena’s fund, with lower SD, was more peaceful and steady. By the end of 5 years, Meena stayed invested and earned full CAGR.
Varun exited twice during dips, ending with only 7.5% CAGR.

Conclusion

Standard Deviation doesn’t just measure math — it tells you how calm or chaotic your investing journey will be.

Before you choose a fund, check if its SD matches your comfort with volatility. Peace of mind matters as much as returns.

Summary Table: Understanding Standard Deviation

Term	Meaning	Ideal for	Risk Signal Level
Standard Deviation	How much returns fluctuate around average	Conservative to Balanced Investors	< 5 (Low), > 10 (High)

Dr. Satish Vadapalli
Research Analyst

What is Standard Deviation in Mutual Funds?

Introduction

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