How Understanding Batting Style of Chris Gayle & Virat Kohli Can Help To Select Mutual Funds?

When it comes to cricket and ongoing season of IPL 2024, we couldn’t help but notice how each player has a unique style and impact on the game. Similarly, in the world of investments, different assets behave differently. One key measure used to understand this behavior is standard deviation.

Standard deviation is a statistical measure of the volatility or dispersion of returns for a given security or market index. To simplify this concept, we can think of batting style of Chris Gayle and Virat Kohli.

Chris Gayle known for his explosive batting in T20 cricket, Gayle’s innings can range from scoring a quick 0 to a sensational 100. His performance is highly volatile, much like the ups and downs we see in certain types of investments, such as stocks. This volatility is reflected in a high standard deviation.

Virat Kohli, in contrast, is known for his consistent performance in T20 cricket, typically scoring runs in every innings. His performance is more dependable and predictable, similar to the stability we often associate with certain investment products like bonds or fixed deposits. This stability is reflected in a low standard deviation. (Virat has highest batting average in T20 cricket!)

Why is Standard Deviation important?

Understanding the standard deviation of an investment is crucial because it helps investors gauge the risk associated with that investment. A higher standard deviation indicates higher volatility and therefore higher risk. On the other hand, a lower standard deviation suggests lower volatility and lower risk.

For investors, it’s important to align their risk tolerance with the standard deviation of their investments. Those seeking higher returns might be comfortable with the volatility associated with high standard deviation investments, much like the thrill of watching Chris Gayle bat. However, those looking for stability and predictability might prefer investments with lower standard deviation, similar to the reassurance of Virat Kohli’s consistent performances.

Comparing Standard Deviation for various Mutual Fund Categories

As we can see from above table, when an investor moves his investment from Debt to Hybrid and towards Equity, Standard Deviation increases. It indicates that avg. return from Small Cap Fund can be 26.60% +/- 15% (actual return can be anywhere between 12% to 41%) making it less predictable and inconsistent and return from Liquid Fund will be 5.30% +/- 0.5% (actual return range will be 4.8% to 5.8%).

Investors investing in any of the mutual fund category should be aware of the range returns possible and embrace the volatility. If you prefer consistency of returns like Virat, debts funds are more suitable for you and if you enjoy both zeros and century of Gayle equally then you may choose equity funds.

Conclusion

In the world of investments, understanding standard deviation can help investors make informed decisions. By comparing it to the performance of cricketers like Chris Gayle and Virat Kohli, we can simplify this complex concept and make it more relatable. Just as in cricket, where different players have different styles and impacts on the game, different investments behave differently, and standard deviation helps us understand and manage the risks associated with them.

So, the next time you watch a cricket match, remember the principles of standard deviation while cheering for your favorite team!

Disclaimer: This blog is for information purpose only and not an investment advice. Mutual Fund investments are subject to market risk. Consult your advisor before making any investment decisions.