If you are planning to invest in mutual funds, then just knowing about a scheme isn’t enough. Whether you are an experienced investor or a beginner, it is important for you to know the various terms and metrics used to measure fund performance. Among the various terms used, trailing returns and rolling returns assess how well a mutual fund has performed over time.
In this article, we will explore trailing and rolling returns, explain how they work and their key differences. We will also understand how to use these returns to guide your investment decisions effectively.
Importance Of Understanding Mutual Fund Returns
Since the corpus fund collected from several investors is invested in stocks, bonds, or other forms of assets, mutual funds provide diversification in the investment portfolio. Returns on mutual funds indicate the profit made by the fund due to its investments, owing to the potential change in stock market prices. It is essential to understand the different methods that are used to measure mutual fund returns and guide your investment decisions.
Overview of Trailing and Rolling Returns
Mutual funds trailing returns: Trailing returns are the returns calculated over a definite time period, say, over one year, three years, or five years. It calculates the performance of an investment specific period leading up to the current date.
Rolling Returns of mutual funds: On the other hand, rolling returns refer to investment and performance over multiple overlapping periods. The key difference is that rolling returns are continuously updated as each period ends, providing a dynamic view of the fund’s performance.
For example, trailing returns are like a snapshot of a fund's performance at a particular point in time, whereas rolling returns are like a video clip showing how the performance unfolded overtime over a series of periods.
Definition of Trailing Returns
Trailing returns are the returns of a mutual fund over a set period, ending at a specific point in time. Trailing returns are often used to evaluate the recent performance of a fund and are calculated by comparing the current value of the fund to its value at the start of the defined period.
For example, a one-year trailing return shows how much a mutual fund has gained or lost in the past 12 months. Similarly, a three-year trailing return provides the performance over the last three years, and so on.
Key Features of Trailing Returns
Performance Measurement over Time: They provide a picture of how a fund has performed over a fixed period, offering insights into how the fund has performed in the specified timeframe.
Easy Comparison: Trailing returns allow for easy comparison between different mutual funds or other investments, provided they are calculated over the same time period.
Long-Term Assessment: Investors can use trailing returns to evaluate long-term performance.
Risk Assessment: By looking at fluctuations in trailing returns, investors can understand the stability and risk associated with a fund.
Definition of Rolling Returns
Rolling returns of mutual funds are the average annualised returns of an investment over a specific period (such as 1 year, 3 years, etc.), calculated by looking at overlapping time frames. For instance, to calculate one-year rolling returns, you check the returns for the past 12 months, then move forward by one month and repeat this until the end of the chosen time frame (such as five years).This method allows a clear and up-to-date view of how a mutual fund performs over time.
Importance of Frequency in Rolling Returns
An often-overlooked but crucial aspect of rolling returns is frequency. Frequency refers to how often rolling returns are calculated —for example, daily, monthly, quarterly, or annually. This element plays a significant role in how rolling return data should be interpreted.
When rolling returns are calculated at a monthly frequency, the analysis captures more data points and reflects short-term fluctuations along with long-term trends. This is commonly used by investors and fund analysts because it balances detail with clarity. On the other hand, daily rolling returns can appear more volatile and are typically used for deeper technical analysis, while annual rolling returns offer a smoother, high-level view of long-term consistency.
For instance, a 5-year rolling return calculated monthly means the fund’s returns are evaluated for every possible 5-year period using month-end NAVs. This results in multiple overlapping data points, giving investors a clearer understanding of how the fund performed across different market cycles—bull phases, corrections, and downturns.
Understanding frequency is important because:
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Higher frequency (daily/monthly) highlights volatility and short-term consistency
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Lower frequency (annual) smooths returns and highlights long-term behaviour
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Comparisons between funds are meaningful only when rolling returns use the same frequency
Therefore, when analysing rolling returns, investors should not only look at the time horizon (1-year, 3-year, 5-year) but also pay close attention to the frequency at which those returns are calculated. This ensures a more accurate, apples-to-apples comparison and better-informed investment decisions.
Key Features of Rolling Returns
Dynamic Assessment: Rolling returns are continuously updated to give a more flexible and real-time view of an investment's performance.
Smoothing Market Volatility:Using overlapping periods, rolling returns help reduce the impact of short-term market volatility and a smoother performance measurement is offered.
Rolling Analysis:Thanks to various intervals on which returns are considered (say one-year, three-year, or five-year), rolling analysis enables an in-depth analysis into fund performance.
Realistic Expectations:Rolling returns provide a more continuous and realistic perspective by accounting for the fact that market conditions can change at any time.
Consistency Measurement:They help investors understand how consistently a mutual has performed over time.
Trailing vs Rolling Returns
Timeframe
Trailing returns of mutual funds reflect performance over a fixed period – one-year, three-year, five-year etc.
Rolling returns of mutual funds calculate performance over overlapping periods, giving investors a continuous, dynamic update of performance over time.
Flexibility
Trailing returns of mutual funds offer fixed periods, making them easy to interpret and compare for specific periods.
Rolling returns of mutual funds provide a more flexible and nuanced view, allowing investors to analyse the performance in varying market conditions and timeframes.
Market Conditions
Trailing returns are prone to short-term market fluctuations. A fund may appear to perform well over a fixed period, even if it had periods of significant volatility during that time.
Rolling returns smooth out the effects of market volatility, providing a more consistent and realistic view of a fund’s long-term performance.
Use Case
Trailing returns can be helpful when you need to assess the recent performance of a fund over a specific period.
Rolling returns may be better suited for understanding how a fund has consistently performed over time, making them valuable for long-term investors.
For example, if you’re comparing two funds, one fund may show impressive one-year trailing returns, but another fund may have rolling returns that reveal consistent performance over five-year periods. Such insights can help identify the right fund which is better aligned to your goals and risk appetite.
Making Investment Decisions Using Trailing vs Rolling Returns
The first step is to use trailing returns to assess a fund for short-term performance by comparing it with other funds within the same time frame.
Next, consider rolling returns, which are used to establish a fund's consistency and performance over varying time frames.
By using both methods, you can perform a thorough analysis of a fund’s past performance, which empowers you to align investment decisions with your objectives and risk appetite.
Conclusion
In conclusion, trailing returns and rolling returns are two invaluable metrics that investors use to evaluate the historical performance of mutual funds. Trailing returns give a fixed, point-to-point snapshot of fund performance, while rolling returns offer a more dynamic, flexible view by considering overlapping periods. By understanding the differences between these two methods, you can make more informed decisions about where to invest your money.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
