Definition of Standard Deviation
In investing, standard deviation is a statistical measure of how much a mutual fund's returns vary from its average return over a given period. It is the most commonly used measure of volatility or risk in mutual fund analysis.
A high standard deviation means the fund's returns are widely spread — for example, returning 40% in one year and −15% the next. A low standard deviation means more consistent, predictable returns. For example, a liquid fund might have standard deviation of 0.1, while a small cap fund might have standard deviation of 25 or more.
Standard deviation is used alongside other metrics like Sharpe Ratio and Beta to give a complete picture of a fund's risk profile. When comparing two funds with similar average returns, the one with the lower standard deviation is generally preferable for risk-averse investors. SEBI requires AMCs to disclose standard deviation in the monthly fund factsheets.