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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection

Two equity funds have the same category and 5-year return. Fund A has a standard deviation of 18% and Fund B has 12%. Considering only this information, what can a distributor conclude?

Fund B was better on a risk-adjusted basis, since it generated the same return with a lower standard deviation of 12% against 18%. Standard deviation measures volatility, so lower volatility for equal return means more return per unit of risk.

  1. AFund B delivered the same return with lower volatility, so it was better on a risk-adjusted basisCorrect
  2. BFund A is better because higher volatility means higher future return
  3. CBoth are equal because returns are equal
  4. DFund B must have a lower expense ratio

Explanation

Standard deviation measures total volatility. With equal returns, the fund with lower standard deviation gave better return per unit of risk. High volatility does not guarantee higher future return, and expense ratio cannot be inferred.

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