Standard Deviation in Mutual Funds: Uses & Calculation
When you look at a mutual fund's performance card in 2025, the return percentage is often the first thing that catches your eye. However, returns only tell you where the fund arrived; they don't tell you how bumpy the ride was. This is where Standard Deviation (SD) becomes your most important tool.
Standard Deviation is a statistical metric that measures a fund's volatility. In simple terms, it tells you how much the fund's actual returns stray from its average return. As the Indian markets reach new milestones in late 2025, understanding SD is crucial for distinguishing between a fund that grows steadily and one that swings wildly. At Motilal Oswal, we believe that knowing your fund's SD is the first step toward Buying Right and Sitting Tight, as it ensures the investment's shake-ups match your personal comfort level.
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What is Standard Deviation?
Standard Deviation represents the total risk of a mutual fund. While Beta measures risk relative to the market, Standard Deviation measures the fund's inherent volatility based on its own history.
Imagine two funds, both averaging a 15% annual return:
- Fund A has a Standard Deviation of 3%. This means its returns usually stay close to the 12%–18% range. It’s a smooth, predictable ride.
- Fund B has a Standard Deviation of 12%. Its returns could swing anywhere from 3% to 27%. This is a high-speed rollercoaster.
The 68-95 Rule
In the world of finance, we often use the Normal Distribution rule to predict future performance:
- 68% of the time, a fund's return will fall within one SD of the average.
- 95% of the time, it will fall within two SDs.6
This helps you set realistic expectations for the worst-case and best-case scenarios in any given year.
Why Standard Deviation Matters in 2026
As of late 2025, the Indian market has seen increased participation from retail investors. Here is why SD is a vital metric for your portfolio today:
- Measuring Consistency: A lower SD indicates that the fund manager is delivering consistent performance without taking extreme bets.
- Risk Profiling: If you are a conservative investor, a fund with an SD higher than its category average might cause you unnecessary stress during market dips.
- Comparing Peers: If two funds have the same 5-year return, the one with the lower Standard Deviation is technically better because it achieved those returns with less drama.
- Calculating the Sharpe Ratio: SD is a key ingredient in the Sharpe Ratio, which Motilal Oswal experts use to determine if the extra returns of a fund are worth the extra risk being taken.
How to Calculate Standard Deviation
While the Motilal Oswal Rise App provides these calculations automatically, understanding the math under the hood helps you become a more informed investor.
The Formula
The formula for the sample Standard Deviation (s) is: SD= √(X - µ)2 / (N - 1)
Where:
- X = Each return
- µ = Mean (average) of the returns
- n = Total number of returns
Step-by-Step Example
Consider a hypothetical mutual fund with the following annual returns over four years: 14%, -8%, 9%, and 6%.
1. Annual Returns (x_i):
[14, -8, 9, 6]
2. Calculate the Mean (µ):
Sum the returns and divide by 4: (14 - 8 + 9 + 6) / 4 = 21 / 4
µ = 5.25\%
3. Deviations (x_i - µ):
Subtract 5.25 from each return:
[14 - 5.25, -8 - 5.25, 9 - 5.25, 6 - 5.25] = [8.75, -13.25, 3.75, 0.75]
4. Squared Deviations (x_i - µ)^2:
[8.75^2, (-13.25)^2, 3.75^2, 0.75^2] = [76.56, 175.56, 14.06, 0.56]
5. Sum of Squared Deviations:
76.56 + 175.56 + 14.06 + 0.56 = 266.74
6. Final Standard Deviation ($SD$): Divide by $n - 1$ ($4 - 1 = 3$) and take the square root: 9.43%
Standard Deviation Across Categories
Different types of funds naturally have different normal SD levels. In 2026, these are the typical ranges we see in the Indian market:
Fund Category
Typical SD Range
Volatility Level
Liquid Funds
0.1% – 0.5%
Extremely Low
Debt Funds
1% – 4%
Low to Moderate
Large Cap Funds
12% – 16%
Moderate
Small Cap Funds
18% – 25%
High
Thematic/Sector Funds
20% – 30%
Very High
Using SD with Motilal Oswal’s Strategy
At Motilal Oswal, our Buy Right Sit Tight philosophy often involves looking for funds that exhibit a high Active Share but a controlled Standard Deviation. We aim for Efficient Portfolios—those that provide the maximum possible return for every unit of SD (risk) taken.
When reviewing your portfolio on our platforms, look for the Riskometer. A fund labeled as Very High Risk almost always has a high Standard Deviation, signaling that you should be prepared for significant price swings in the short term.
Conclusion
Standard Deviation is the volatility yardstick of the investment world. It doesn't tell you if a fund is good or bad, but it tells you how wild the journey will be. A high SD is perfectly fine for a young investor with a 20-year horizon, but it could be dangerous for someone needing their money in two years. In 2026, as market dynamics evolve, using SD alongside Alpha and Beta will give you a 360-degree view of your investments. By checking these metrics through Motilal Oswal’s research tools, you can ensure that your portfolio stays within your emotional comfort zone, allowing you to stay invested long enough to reap the rewards of compounding.