Return vs volatility: is the return worth the ups and downs?

Two funds may both return 8% a year, but one moves smoothly while the other swings alarmingly. This chart shows how much up-and-down each return came with, compared with funds in the same category. It is under "Go deeper" in the "Risk" section of the fund page, shown when there are funds in the group to compare with.

The corner labels in the picture are only there to explain this article; the actual fund page does not show them. The 1Y, 3Y and 5Y buttons choose the period, and hovering over a dot shows that fund's name, return, volatility, AMC and expenses.

How it's calculated

1. Funds compared: funds in the same AIMC category, counting 1 share class per fund and only share classes for retail investors. There must be at least 5 funds with data for the period
2. Vertical axis, return = last NAV ÷ NAV at the start of the period − 1, including dividends. The 3-year and 5-year periods are converted to % per year
3. Horizontal axis, annual volatility = the standard deviation of daily returns over the period × √252 (roughly the number of business days in a year). The higher it is, the bigger the swings
4. Return per unit of volatility = return ÷ volatility. For example, ABC-A returned 8.2% with 11% volatility, giving 8.2 ÷ 11 ≈ 0.75, while a fund that returned 10.4% with 26% volatility scores only 10.4 ÷ 26 = 0.40
5. Above the chart is a line summarising the ranking, such as "Over 3 years, ABC-A returned 0.75 per unit of volatility, ranked 2 of 17 funds", sorted from highest to lowest

Reading a dot's position

• Top left (above the average return line, left of the average volatility line): earns more than the group with fewer swings than the group. The best position
• Top right: earns a lot, but you have to put up with big swings. Suits people who can tolerate volatility
• Bottom left: small swings but low returns. May suit money where stability comes first
• Bottom right: big swings but lower returns than the group. A position where you should ask why you are still holding it

Why it helps and how to use it

1. Choosing within the same category: if several funds give similar returns, choose the one further to the left, since you get the same return with less stress
2. Comparing funds that invest in the same master fund (green dots): these funds should sit close together. If one is clearly lower, check the expenses shown when you hover over the dot; the gap usually comes from fees or the currency hedge
3. Switch between 1, 3 and 5 years. A fund that stays in the top left in every period is more consistent than one that reached the top left in just one year
4. Use it together with max drawdown. Volatility measures the average daily ups and downs, while drawdown shows the single deepest fall. Two funds with the same volatility may not fall by the same amount