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

While comparing two large-cap equity funds, a distributor notes that Fund A has a five-year return of 12% with a standard deviation of 18%, while Fund B has a return of 12% with a standard deviation of 14%. Both have the same benchmark. What is the correct conclusion?

Fund B is better on a risk-adjusted basis because it earned the same 12% return with lower volatility of 14% against 18%. Standard deviation measures total variability, so lower dispersion for equal return indicates more efficient risk-taking.

  1. AFund A is better because higher volatility means higher return
  2. BFund B is better on a risk-adjusted basis because it delivered the same return with lower volatilityCorrect
  3. CBoth are identical because returns are equal
  4. DFund A is better because standard deviation measures only upside

Explanation

With equal returns, the fund with lower standard deviation has taken less risk per unit of return, so its risk-adjusted performance is superior. Standard deviation captures both upside and downside variability, not upside only.

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