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

While comparing two diversified large cap equity funds, a distributor finds Fund A has a 5-year return of 14% with a standard deviation of 16%, and Fund B has a 5-year return of 14% with a standard deviation of 12%. Assuming same benchmark and category, which conclusion is most appropriate?

Fund B is better on a risk-adjusted basis. Both funds earned 14%, but Fund B did so with a lower standard deviation of 12% against 16%, meaning less volatility for the same return. Higher volatility does not indicate skill, so equal returns do not make the funds identical.

  1. AFund A is better because higher volatility means higher skill
  2. BFund B delivered the same return with lower risk, so it is better on a risk-adjusted basisCorrect
  3. CBoth are identical since returns are equal
  4. DFund A is better because standard deviation is irrelevant

Explanation

Standard deviation measures volatility. With equal returns, the fund with lower standard deviation (Fund B) gives better return per unit of risk. Volatility itself is not a sign of skill.

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