Understanding the risk associated with an equity investment

Published: October 3, 2016 at 12:33 pm

Last Updated on

When returns fluctuate wildly it is important to not only measure ‘average’ return (CAGR or XIRR), but also to measure risk – that is, quantify the fluctuations.

The simplest way to do it is to calculate the standard deviation and best non-technical illustration of the same is from Subra:

Rahul Dravid’s individual score will typically be close to his average – Low standard deviation. Example, debt mutual funds

Virender Sehwag’s individual score can just about be anything! High standard deviation.Example, gold, stocks, equity mutual funds.

Here is a 3-minute video on what the standard deviation is and how it can be used to measure risk associated with an equity investment.

I strongly believe that understanding standard deviation is the key to successful mutual fund investing.

It is a fantastic way to select mutual fund categories suitable for your financial goals

Although useful to get a sense of volatility, the standard deviation is too simplistic to make predictions. So one should use it with care/caution.

Hate ads but would like to support the site? Subscribe to our ad-free newsletter and get beautifully formatted full articles delivered to your inbox!

I have written several posts about standard deviation. Here are a few:

Visualizing Mutual Fund Volatility Measures

Mutual Fund Investing: Risk vs. Reward vs. Volatility

What Return Can I Expect From Equity Over the Long-term? (Part 2)

Here are two screenshots of the performance tab at Value Research: standard deviation and average monthly return over the last 3Y are listed here.

Standard-deviation-VR
At Value Research

The risk & rating tab at MorningStar where the standard deviation is listed along with the CAGR.

At MorningStar
At MorningStar

Higher the standard deviation, higher the volatility. This is reason why Gold is riskier than Stocks!

Do share if you found this useful
Hate ads but would like to support the site? Subscribe to our ad-free newsletter and get beautifully formatted full articles delivered to your inbox!

About the Author

M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Linkedin
Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. For speaking engagements write to pattu [at] freefincal [dot] com

About freefincal & Content Policy

Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site.
Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)

Connect with us on social media

Our Publications


You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingMy first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.  It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantGamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)  

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

Comment Policy

Your thoughts are the driving force behind our work. We welcome criticism and differing opinions.Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

Leave a Reply

Your email address will not be published. Required fields are marked *