Volatility is the measure of how much the fund's growth varies over time from its average growth rate.

Why is Volatility Important?

Volatility is important because a fund may be bought when it is relatively expensive compared to its annualised growth and sold when it is relatively cheap compared to its annualised growth, so that the fund's growth in that period is less than its sector average over a longer period. Although volatility can also work to the investor's advantage, it is considered undesirable since investors often buy and sell at certain times for reasons other than the price of the fund.

Can Volatility be Avoided?

Volatility is inevitable in the stock market where prices fluctuate from moment to moment. However, some investment managers have been better than others at maintaining a steady growth rate. Diversification of investments should reduce volatility.

Volatility is illustrated on the Total Return Graph

The volatility of a fund is illustrated on the Total Return graph. The pale dotted curve on the graph shows what the value of the fund would have been if it had grown at a constant rate. A measure of the volatility can be seen by looking at how far the line which shows the actual return of the fund over time fluctuates away from the constant growth line.

The Constant Growth Line

The Constant Growth line gives some information about the return on investments made since the beginning of the graph. Units purchased when the actual price was lower than the constant growth line have had a better rate of return in the period to date than the quoted annualised return. Units purchased when the actual price was higher than the constant growth line have had a lower rate of return.

Volatility Data

Standard Deviation is a statistical measure of volatility and this has been calculated for each fund over the period illustrated on the graph. The fund with the lowest standard deviation in proportion to its return is ranked first for volatility for that period.