A statistical measure of how much a fund's returns fluctuate around its average return — the primary measure of volatility.
Standard deviation in mutual funds measures the dispersion of a fund's monthly or annual returns around its mean return. A high standard deviation means returns are volatile and unpredictable; a low standard deviation means stable, predictable returns.
If a fund averages 12% return but ranges from -20% to +40% each year, its standard deviation is high. If another fund averages the same 12% but always stays between 8% and 16%, its standard deviation is low. Lower standard deviation = smoother ride.
Collect the fund's monthly returns over a period (usually 3 years).
Calculate the average monthly return.
Measure how far each month's return deviates from the average.
Standard deviation is the square root of the average of these squared deviations.
Fund A: Average annual return 12% | Standard Deviation 8% Fund B: Average annual return 12% | Standard Deviation 22% Both average 12%, but: Fund A's returns typically fall between 4% and 20% each year. Fund B can swing between −10% and +34%. For a conservative investor or anyone nearing their goal, Fund A is far preferable — same expected return, far smoother ride.