Rolling Returns

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Article Content

What are Rolling Returns?
How To Calculate Rolling Returns?
How To Interpret Rolling Return For Decision Making?
What are Trailing Returns?
How To Interpret Trailing Return For Decision Making?
How to Calculate Trailing Returns?
Annual Return Vs Trailing Return Vs Rolling Return: Which is More Useful?

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 and trailing returns.

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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 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.

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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

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

* It is important to follow both 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 years, 5 years, or 10 years. 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 the 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 biased calculation over any period of time.
Moreover, rolling returns also compute the mean returns of a mutual fund which gives insights to the investor about the goodwill and consistency of the fund.

What are Trailing Returns?

Trailing returns is a way to calculate the performance of a mutual fund scheme for a specific duration like 1 year, 3 years, 5 years or since inception. It indicates the performance from a particular point in time to another particular point in time. Thus, trailing returns are also called point-to-point returns. It considers how much the investment has risen or fallen since it was purchased.

Trailing returns provides a transparent picture of the scheme’s performance in comparison to absolute returns. For instance, if a scheme has performed well over the past 10 years and not as good in the last 3 years, trailing returns can indicate this sedating growth.

The trailing return is calculated by subtracting the current price (NAV) from the investment price at the beginning of the period. The value is again divided by the price of the beginning period. Thus, with these returns, investors can evaluate an investment performance over a specific time period.

How To Interpret Trailing Return For Decision Making?

The following are the ways to interpret trailing returns for decision-making in India –

It helps to measure the mutual fund performance for the past specific periods like 1 year, 3 years, 5 years or since inception. Thus, investors do not have to make assumptions about future price movements.
Trailing returns calculations depend on what happened in the past and do not consider any predictions of future performance. Simply put, it uses historical data for calculations.
Investors use trailing returns to analyse how volatile the investment has been historically.
It helps to spot trends in investments. If the trailing returns have declined for a particular period, it helps in deciding whether to sell the investment.
Trailing returns help to compare the performance with the benchmark whether the fund has underperformed or outperformed over the measured time horizon.
Finally, investors use these returns to compare different mutual fund performances. It helps to determine which fund is better to fit one’s needs.

It is important to note that past performance does not guarantee future performance. It should not be used as the only measure to determine the investment’s potential.

How to Calculate Trailing Returns?

The trailing returns are calculated using the mutual fund’s Net Asset Value (NAV). It is the price per unit of the mutual fund. This return can be calculated in the following way –

Firstly, subtract the current NAV from the beginning period NAV.
Next, divide this change in value by the beginning period NAV and multiple by 100 to get the percentage return for the period.

Trailing returns = (Current period NAV – Beginning period NAV) / Beginning period NAV

Example: Let us consider an ABC mutual fund scheme with the current NAV of Rs.20. You want to determine the trailing returns for the previous 5-year period. The original NAV at the beginning of 5 years was Rs.15.

Trailing Returns for 5 year period = (20 – 15)/15 * 100 = 33%

Similarly, you can calculate trailing returns for different time periods.

Annual Return Vs Trailing Return Vs Rolling Return: Which is More Useful?

The following are the differences between annual return vs trailing return vs rolling return

Parameter	Annual Return	Trailing Return	Rolling Return
Meaning	It measures how much the investment has earned per annum.	It helps to evaluate the mutual fund performance for a specific time duration i.e between two dates.	It helps to evaluate the mutual fund performance at different points in time on a continuous basis.
Market volatility	Does not give an indication of market volatility.	Does not show the market fluctuations while evaluating.	This return shows the market volatility as it can fetch more accurate results.
Strategy	It focuses on analysing investment performance over any given year.	It focuses on entry and exit into the scheme.	It focuses on the holding period.
Uses	It measures the performance consistency of investment.	It shows the compounding effects on returns.	It measures performance consistency and fund volatility.
Limitations	High chance of recency bias where investors give weightage to near-term results rather than a series of results over a period of time.	It requires an element of luck or timing which complicates when recency bias is added.	The concept of rolling returns is complex and no clear formula to compute it easily.

Most investors prefer investing through SIP in mutual funds. In such cases, rolling returns is more reliable for evaluating a fund’s performance as it covers the market fluctuations and reflects consistency in performance. However, using one type of return for evaluating the investment may make you lose the big picture while making investment decisions. Therefore, it is advisable to compare funds using the annual, trailing and rolling returns.