Standard Deviation in Mutual Funds - Meaning, Formula, Example & Risk Analysis

Mutual fund investors often focus on returns, but understanding risk is equally important. That’s where Standard Deviation (SD) comes in. It is one of the most widely used measures of risk in Mutual Funds, helping you identify how much a fund’s returns fluctuate compared to its average.

In this guide, we’ll explain standard deviation in mutual funds with simple examples, India-specific insights, latest market data, and comparisons with other risk measures.

What is Standard Deviation?

Standard deviation is a statistical measure of Volatility. In mutual funds, it shows how much the fund’s returns deviate from its average returns.

• High Standard Deviation → Fund returns fluctuate widely → Higher risk.

• Low Standard Deviation → Returns stay close to the average → Lower risk.

Example:

• Fund A has an average annual return of 12% with SD of 8.
• Fund B has an average annual return of 12% with SD of 3.

Even though both funds give 12% on average, Fund B is more stable (less risky) compared to Fund A.

Why Standard Deviation Matters in Mutual Funds

• Risk Assessment – Helps you know how volatile a fund is.
• Comparison Tool – Compare funds within the same category.
• Investor Suitability – Guides risk-averse vs. aggressive investors.
• Portfolio Diversification – Helps balance risk between equity, debt, and Hybrid Fund.

Formula for Standard Deviation

Where,

• Xi = individual returns
• 𝑋ˉ = average return
• N = number of observations

Simplified: Standard deviation measures how far each return is from the average return.

How to Calculate Standard Deviation?

To find standard deviation on a mutual fund, add up the rates of return for the period you want to measure and divide by the total number of rate data points to find the average return. Further, take each individual data point and subtract your average to find the difference between reality and the average. Square each of these numbers and then add them up.

Divide the resulting sum by the total number of data points less one -- if you have 12 data points, you divide by 11. The standard deviation is the square root of that number.

Let's understand better with illustration-

1. Find the Standard Deviation of both stocks

Let's find the SD of two different Mutual Funds. First, we will calculate their average return for the last five years.

Mutual Fund A: (11.53% + 0.75% + 12.75% + 32.67% + 15.77%)/5 = 14.69%

Mutual Fund B: (4.13% + 3.86% + {-0.32%} + 11.27% + 21.63%)/5= 9.71%

2. Calculate the variance of each stock

Since Standard Deviation is the square root of variance, we must first find the variance of each investment.

Then, you divide the sum of the squares from the first step by the 1 less the number of years (∑/n-1).

Mutual Fund A: (11.53%-14.69%)² + (0.75%-14.69%)² + (12.75%-14.69%)² + (32.67%-14.69%)² + (15.77%-14.69%)²= 0.052/4=.013

Mutual Fund B: (4.13%-9.71%)² + (3.85%-9.71%)² + (-0.32%-9.71%)² + (11.27%-9.71%)² + (21.63%-9.71%)²= 0.032/4=.008

3. Find the Standard Deviation for each

Mutual Fund A: √.013= 11.4%

Mutual Fund B: √.008= 8.94%

4. Standard Deviation in Excel

Excel offers the following functions:

• STDEV.P to calculate standard deviation based on the entire population

• STDEV.S to estimate standard deviation based on the sample

Using the functions one can determine the SD of the fund.

Example of Standard Deviation in Mutual Funds

Standard Deviation vs Other Risk Measures

Pro tip: Don’t rely on just SD. Always check Beta, Sharpe Ratio, and Alpha for a complete risk analysis.

Standard Deviation in SIP vs Lump Sum

• SIP Investors: Standard deviation matters less because rupee cost averaging smooths volatility.

• Lump Sum Investors: Standard deviation plays a bigger role because money is exposed to market fluctuations at once.

Practical Example

• HDFC small cap Fund (SD ~ 23) – High volatility, but 5-year CAGR of ~22%.

• ICICI Prudential Bluechip Fund (SD ~ 14) – More stable, with 5-year CAGR of ~13%.

Both are good funds, but choice depends on risk appetite.

FAQs

Q1. What is a good standard deviation for mutual funds?

A: A good SD depends on fund type. For Equity Funds, 12–18 is normal, while for debt funds, below 6 is considered safe.

Q2. Can a fund have high returns but low standard deviation?

A: Yes, some consistent Large cap funds or hybrid funds can achieve this.

Q3. Is standard deviation useful for short-term investments?

A: Not much. For short-term, focus on liquidity and safety (Liquid Funds).

Q4. How often is SD calculated?

A: Usually monthly or yearly, based on historical returns.