If you are given a few numbers, and told to find their average, you can very easily do that. Now, if these numbers are more or less near to the average value, you can say that the data range is very near to the average value. To that extent, the data is stable. In case of NAV1 in the example below, the data range is 10.24 -- 15.02 (the lowest and highest value), which is relatively nearer to the mean or average value of 12.72.

• SIP or ULIP? Which is better?

For instance, if you have to calculate the average (mean) age of five children aged 32, 34, 36, 38 and 40 years, you add the ages and divide it by 5. In this example, the mean will come out to 36 (32+34+36+38+40 / 5). 

However, if the data range were large on either side of the average value, it would mean that the data is fluctuating a lot. In NAV2, for example, the data range is from 22.96 to 36.43 and the mean is 29.11, which indicates high fluctuation.

2006	NAV1	NAV2
January	11.6	23.88
February	12.14	26.47
March	13.21	30.80
April	14.02	31.87
May	15.02	31.88
June	10.24	22.96
July	10.89	25.24
August	11.71	26.95
September	12.22	27.81
October	13.37	31.00
November	13.88	33.94
December	14.30	36.43
Average	12.72	29.11
SD	1.472	4.179
% change	23%	53%

When it comes to your investments, you would like to have an instrument whose value steadily increases over time. However, since this is not practically possible in the case of stock markets (and, as a direct result, with equity mutual funds), you would like to have a scheme, where NAV has an upward trend but is not subject to wild fluctuations.

SD measures how far from the average the values sway. So, in case of huge swings, the SD will be higher. In case of low fluctuations, the SD will be lower. As can be seen above, the SD for NAV1 is 1.47, while that for NAV2 is 4.18.

Let us try to see this by the following example. We have taken the data mentioned under the columns NAV1 and NAV2. The only difference is, we have equated the first value of both the series to 100.

Now, if you observe, not only does the thick light blue line (representing the trend of NAV1) have a gentler slope than the thick light pink line (representing the trend of NAV2), the swing of the data (NAV1 � dark blue data line) on either side of the light blue line is lesser than that for the other set of data (NAV1 -- dark pink data line).

This means the scheme represented by NAV1 (ELSS) is less volatile than the scheme represented by NAV2 (of a power sector fund).

Take a look at the SD of these two data sets (base value = 100). You will notice the annual returns for NAV1 has been 23 per cent while that for NAV2 is 53 per cent.

How averaging works

Take a look at Chart 2. You will see the number of units increasing as the price falls. This is obvious, since you are investing a fixed amount every month.

• What's a mutual fund SIP? 

When the same amount is used to buy units at various prices, then you will get more units when the price is less and less units when the price is more. This can be seen in Chart 2 where, as the NAV rises till May, the number of units bought falls. In May, as the NAV crashes, the number of units zoom up, only to steadily fall as the NAV rises till December.