The equity market is driven by multiple factors such as technical, behavioral and fundamental. While fundamental investors are rewarded over the long-term, the traders, speculators, and other market participants impact the market over a short term. In addition, the market volatility is also caused because of macroeconomic development, geopolitical tension, and many other factors.

How Do We Measure Volatility?

Market volatility is a measure of price fluctuation. With high volatility, price fluctuation is higher, not only in terms of frequency but also in terms of quantum. On the other hand, low volatility results in fairly stable and consistently performing market. Volatility plays a key role while selecting a stock for investment. The following parameters help you assess volatility:

Standard Deviation:

One of the primary parameters to measure volatility is the standard deviation. It is generally depicted by delta and depicts the average amount by which the price of a stock has differed from its mean value over a period of time. Mathematically it is shown as –

Mean value = Sum of all values / Total number of values

Variance = [Sum of all (Price value – Mean Value)^2]/(Total number of values -1)

Standard Deviation = Square root of (Variance)

A high value of standard deviation depicts higher volatility. We often come across standard deviation of a mutual fund, benchmark index, and category average. While it is not a thumb rule but in general an investor should avoid funds with the very high standard deviation of over 20%. 

Simple Moving Average (SMA): 

It is the average over a period of time and helps in understanding the trend. It is computed as the sum of the closing price for the number of periods, divided by the number of periods.

Beta:

It refers to the amount of fluctuation with respect to the overall market. A beta of a mutual fund reflects the overall volatility of the portfolio with respect to the market (typically the benchmark). A beta of 1.2 indicates that for every 100% movement in the index, the portfolio is expected to move 120%.

Volatility Index

Volatility Index is also termed as VIX. It is a measure of volatility and indicates market sentiments. “VIX” is a trademark of Chicago Board Options Exchange (CBOE) that was the first exchange in the world to compute a volatility index in 1993.

India VIX is volatility index that is based on the nifty price and is computed using best bid and ask quote. VIX indicates investor’s perception of the volatility of market over the next 30 days. High VIX indicates high volatility and vice-versa.

Movement of India VIX

How to Assess a Mutual Fund From a Risk Angle?

For a mutual fund, typically we tend to see the risk-return profile of a fund. For an equity-dominated fund, which generates a return over the long-term period, an investor should ideally look at the following factors:

  • Return over the 3-year period
  • Alpha from benchmark over the 3-year period
  • Beta
  • Standard Deviation

A beta closer to 1 is better, as it indicates that the stocks will drive the performance of the portfolio contained in the fund and is not carried away by the market. Similarly, standard deviation should be ideally less than category average and/or benchmark. This helps you to ensure that risk profile is taken care of.

Let us take an example of Motilal Oswal Multicap 35 Fund

The fund has a better volatility profile (defined by standard deviation) when compared with the benchmark and the category. While the beta for the fund is lower than 1 at 0.88, the fund has seen a considerable return profile alpha of 4.46%. Hence, this makes the fund a good investment option.

To know more about the fund, check out our website,Groww.in

Happy Investing!

Disclaimer: The views expressed here are of the author and do not reflect those of Groww.