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While investing in any mutual fund, most retail investors look at the historical returns generated by the scheme. They consider the different period returns, say 1 year, 3 years, and 5 years. This data is readily available. Also, the ultimate motive of investors is a rate of return that grows their wealth as per their expectations. However, this cannot give the correct picture. Investors should also consider rolling returns if they consider investing based on past performance. To know more, read our complete guide on rolling returns. 

What are Rolling Returns?

Rolling returns are used to evaluate the mutual fund performance over a period of time. It helps to measure the returns at different points in time. This eliminates any bias associated with returns observed at a particular point in time. In other words, it is an average annualized return measured for a given time period of every day/ week/month and taken till the last day of the time duration. Moreover, these returns focus more on the holding period rather than entry and exit into the scheme.

Rolling returns are also termed as Rolling Period Returns or Rolling Time Periods. They measure the fund’s performance on a relative and absolute basis at regular intervals. They consider several blocks such as 3,5, or 10 year periods at various intervals. And check how the fund has performed over that period. This makes returns more indicative of the actual performance of the fund. Therefore, this helps to analyse the return consistency over different periods as it considers both upside and downside market trends. 

For instance, you have a 3-year investment horizon. You want to see the rolling returns of a mutual fund scheme from 1/1/2007 to 1/1/2017. You have to start calculating the annualised return from 1/1/2007 to 1/1/2010 ( change in NAV between 1/1/2007 to 1/1/2010, annualised). Similarly, calculate the annualised return from 2/1/2007 to 2/1/2010 and then from 3/1/2007 to 3/1/2010 and so on. 

How To Calculate Rolling Returns?

Rolling returns are more time-sensitive as they focus on delivering a transparent picture of returns accrued. These returns can be calculated in the following way

  1. First, the investor has to decide the overall time period for the calculation of returns.
  2. The next step is to finalise the intervals on which the returns will be considered. 

*  It is important to follow both the steps as they are linked to each other. The intervals are finalised depending on the time period to evaluate returns

For example, you want to calculate rolling returns for 5-year intervals series. This series starts from 1st Jan 2000 for an overall investment period of 15 years. So the returns will be calculated from 1st Jan 2000 to 31st Dec 2005, 1st Jan 2005 to 31st Dec 2010, 1st Jan 2010 to 31st Dec 2015 and so on, 

Let us understand with another example – 

Mr ABC purchased a fund one year ago for Rs.100 and sold it today for Rs.110. As per trailing returns, it generates 10% returns. However, if the fund value goes down to Rs.108, the calculation will not be accurate for one year period. Therefore, rolling returns give more accurate results as it considers market fluctuations. They calculate returns over different intervals like 1st Jan to 1st Feb, 2nd Jan to 2nd Feb, 3rd Jan to 3rd Feb, and finally draw the average to these returns. This gives a more accurate result. 

How To Interpret Rolling Return For Decision Making?

The following are the ways of how to interpret rolling returns for decision making – 

  • Rolling returns  can give a holistic picture of a fund’s performance across market cycles as it calculates returns for a period for different intervals. 
  • Using different intervals, i.e. 3 year, 5 year, or 10 year period. This can help investors analyse the highest, lowest or average returns accrued by a fund over that specific period. 
  • For the purpose of comparing and analysing two mutual funds over a more extended period of time, rolling returns represent a peculiar insight into the market condition and fund’s performance. 
  • The calculation of fund performance becomes more accurate with rolling returns with the regular and equated examination.
  • While planning investments, using rolling returns is more reliable as it calculates thoroughly over all periods, ensuring no bias calculation over any period of time. 
  • Moreover, rolling returns also compute the mean returns of a mutual fund that gives insights to the investor about the goodwill and consistency of the fund. 

In a nutshell, with the help of rolling returns, investors can determine for the different time periods how the scheme has performed. Also, how many times did the scheme beat inflation. Furthermore, they can get the maximum and minimum return a scheme has given for a specific period. Rolling returns also helps to eliminate the impact of market timing and help investors assess the expected performance of the mutual fund scheme in future. 

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