I would like to know if a lower standard deviation value indicates lesser volatility from the mean level or does this imply that a fund with a lower standard deviation is better? Please explain the concept of beta also
17-Oct-2006 •Research Desk
I have a query regarding the data provided in the Scorecard. A lower standard deviation value indicates lesser volatility from the mean level. Does this imply that a fund with a lower standard deviation is better? Also explain the concept of beta and whether a lower or a higher value indicates a better fund performance?
While standard deviation depicts how much the returns have deviated from the mean level, but it may not necessarily mean that a fund with low standard deviation is good and vice versa. If a fund with high standard deviation delivers much higher returns than the one with a low standard deviation, then the deviation may not matter much. A better measure is the risk-adjusted returns, which states the returns per unit of risk. You can also refer to Value Research star rating, which rates the funds on a scale of one to five (five being the best) on the basis of their risk-adjusted performance.
Beta is a statistical measure that shows how sensitive a fund is to market moves. If the Sensex moves by 25 per cent, a fund's beta number will tell you whether the fund's returns will be more than this or less.
The beta value for an index itself is taken as one. Equity funds can have beta values, which can be above one, less than one or equal to one. By multiplying the beta value of a fund with the expected percentage movement of an index, the expected movement in the fund can be determined. Thus if a fund has a beta of 1.2 and the market is expected to move up by ten per cent, the fund should move by 12 per cent (obtained as 1.2 multiplied by 10). Similarly if the market loses ten per cent, the fund should lose 12 per cent.
This shows that a fund with a beta of more than one will rise more than the market and also fall more than market. Clearly, if you'd like to beat the market on the upside, it is best to invest in a high-beta fund. But you must keep in mind that such a fund will also fall more than the market on the way down. So, over an entire cycle, returns may not be much higher than the market.
Similarly, a low-beta fund will rise less than the market on the way up and lose less on the way down. When safety of investment is important, a fund with a beta of less than one is a better option. Such a fund may not gain more than the market on the upside, it will protect returns better when market falls.