A investor may assume that funds with similar objective carry the same level of risk. This assumption may not be necessarily correct as investment strategies and styles vary among fund managers. To distinguish the risk of different funds, risk measurement methods known as Volatility Factor and Volatility Classification, is used, mainly for funds that have a 3 year history.
Volatility Factor (VF) relates to the sensitivity of the portfolio return of a unit trust scheme/ recognised fund to changes in market conditions and the general economy. It is a measure of the rise and fall of the fund's returns over a period of time relative to its average return. It is basically the annualised standard deviation of the fund over the past 3 years. A fund whose returns fluctuate widely from its average will have a higher VF and vice versa. The VF is revised monthly.
Eg Fund A which has a consistent yearly return of 5% have a VF of zero (0) and less risky as the funds return in any single year is does not differ from the average of 5%. Whereas Fund B with a a higher average return of 10% has a higher risk as its annual return is not consistent, more volatile and vary yearly as follows: +10%, -10% and +30%
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