Rolling & Trailing Returns of Mutual Funds
Investing in mutual funds is a smart way to grow your money. These funds are managed by professionals who handle a wide range of investments, including both bonds and stocks. If you’re looking to invest in a diverse portfolio of stocks, mutual funds are a solid choice. They allow you to invest in a variety of shares all at once, benefiting from the advantages of scale and spreading risk through diversification. When it comes to assessing mutual fund performance in India, it’s a bit of a challenge. There aren’t standardized metrics or statistical tools available for comparing different funds. This lack of uniformity makes it tricky to gauge the performance of individual funds and even harder to evaluate the overall performance of mutual funds collectively. Therefore, there are two prominent ways to evaluate returns based on mutual funds performance: rolling returns of mutual funds and trailing returns mutual funds.
What are Rolling Returns?
Rolling returns in mutual funds are also known as “rolling period returns” or “rolling time periods”. It is the average annualized returns over a specified time interval, whether it’s a week, a month, or the conclusion of any particular duration. In other words, it is a statistical tool to evaluate the performance of an investment or a portfolio over different time periods, continuously rolling forward. MF rolling returns examines the behavior of returns for holding periods.
A holding period refers to the duration for which an investor retains an investment, encompassing the time between the acquisition and subsequent sale of a security. It provides a more comprehensive view of a fund’s performance across various time spans.
However, to calculate & find rolling returns of mutual funds, the formula is:
Rolling Return = (Ending NAV – Beginning NAV) / Beginning NAV * 100
Where:
- Ending NAV = Net asset value of the mutual fund rolling returns period.
- Beginning NAV = Net asset value of the mutual fund at the beginning of the rolling period
Rolling Returns Uses and Benefits
- Rolling returns of mutual funds reduce the bias associated with selecting specific fixed time periods for analysis, as they consider multiple overlapping time frames.
- Rolling returns in mutual funds help in assessing the effectiveness of portfolio diversification by analyzing how various assets perform over time.
- Relatively accurate
- Provides a more realistic picture of how an investment or portfolio has fared over time.
- Good for recurring (i.e. Monthly and Quarterly) or for those engaged in a Systematic Investment Plan (SIP).
What are Trailing Returns?
Trailing returns mutual funds, in simple terms, are a way to measure the historical performance of an investment over a specific period leading up to the present. It is basically returns that can be calculated on the mutual fund’s historical returns, such as 1 year, 3 years, 5 years, or even on a specific date basis.
With the trailing return, you can see the great performance in your funds over 10 years, but you can not see a good performance of 1 or 5 years of your mutual funds.
The formula for calculating trailing returns mutual funds is:
Trailing Return = (Current NAV / Starting NAV) ^ (1 / Trailing Period) – 1
Where:
- Current NAV is the net asset value of the mutual fund on the current date
- Starting NAV is the net asset value of the mutual fund at the beginning of the trailing period
- Trailing Period is the period of time over which the trailing return is being calculated, such as 1 year, 3 years, or 5 years
Imagine you’re looking at a mutual fund, and you want to know how well it has been doing over the last three years. Trailing returns would show you the actual performance of that fund over each of the past three years, right up to today. This information can help you gauge whether the fund has been consistently doing well or if it has had periods of strong and weak performance.
Trailing Returns Uses and Benefits
- They help set realistic expectations by showing how an investment has actually performed rather than relying on projections.
- Compares the performance of different types of investments. Such as- stocks, bonds, and mutual funds.
- Easy to calculate and understand.
- Measures performance based on the past specific years like 1, 3 or 5 years.
- Gauges the risk association level with an investment by analyzing its historical returns and volatility over time.
Example of Trailing and Rolling Returns of Large-Cap Funds
Let’s have a quick look at the best rolling returns mutual fund schemes along with the training returns down below.
| Fund | 1-Year Rolling Return | 3-Year Rolling Return | 1-Year Trailing Return | 3-Year Trailing Return |
|---|---|---|---|---|
| Mirae Asset Large Cap Fund (G) | 3.29 | 13.23% | 0.75% | 11.20% |
| Axis BlueChip Fund | 3.35% | 14.28% | 0.73% | 12.56% |
| ICICI Prudential BlueChip Fund | 0.51% | 10.77% | -2.11% | 8.77% |
| Aditya Birla Sunlife Frontline (G) | -1.30% | 8.25% | -3.95% | 6.55% |
| SBI BlueChip Fund | 1.33% | 8.39% | -2.42% | 6.39% |
| Nippon Large Cap Fund | 3.53% | 12.81% | -0.24% | 10.19% |
| HDFC Top 100 Fund | 6.85% | 12.59% | 3.24% | 10.17% |
| Franklin India BlueChip Fund | 3.40% | 6.30% | -5.75% | 4.24% |
| Kotak BlueChip Fund | 1.05% | 8.52% | -4.34% | 6.46% |
Difference Between Trailing and Rolling Return in Mutual Fund
Trailing returns, also known as point-to-point returns, represent a method for assessing the performance of a mutual fund based on a specific past date or time period. For example, if you purchased a mutual fund one year ago at Rs. 100 and sold it today at Rs. 110, your point-to-point return or trailing return would be 10%. However, this method becomes vulnerable when there are fluctuations in the fund’s value, potentially yielding inaccurate results.
Now, let’s say the fund’s value drops to Rs. 106 the following day. In this case, the point-to-point return is no longer accurate. On the contrary, rolling returns of mutual funds take such fluctuations into account. They assess returns over various intervals, like from January 1st to February 1st, February 2nd to March 2nd, and so on, eventually calculating an average return.
Remember the following points:
- When rolling returns and trailing returns exhibit similar trends over an extended period, it suggests less sensitivity to entry and exit timings.
- Many investors who prefer investing through Systematic Investment Plans (SIP) at regular intervals find rolling returns mutual funds to be a more practical and dependable metric.
Limitation of Rolling Returns with an Example
Imagine you are analyzing the performance of a mutual fund over a 5-year period compared to its benchmark index. You decide to use rolling returns, which involves calculating the fund’s returns over multiple rolling 1-year periods.
| Year | Fund Return | Benchmark Return |
|---|---|---|
| 2015-2016 | 20% | 10% |
| 2016-2017 | 5% | 8% |
| 2017-2018 | -5% | -2% |
Now, if you were to analyze each rolling return independently, you might conclude that the fund performed exceptionally well in the first year, then underperformed in the second year, and had negative returns in the third year. But if you were to use these rolling returns to make investment decisions, you might end up buying the fund after Year 1 (expecting continued strong performance) and selling after Year 2 or Year 3 (due to perceived underperformance or losses).
However, by examining the fund’s overall 5-year performance, you may discover that it consistently outperformed its benchmark with an annualized return of 8%, while the benchmark only returned 6%. This suggests the fund is a good investment over the long term.
Limitations of Trailing Return With Example
One limitation of trailing returns is their focus on historical short-term performance, which may not accurately reflect the fund’s long-term prospects. Consider a mutual fund, Fund XYZ, that has consistently outperformed its benchmark index over the past three years with the following annual returns:
- Year 1: Fund XYZ returned 15%, while the benchmark returned 10%.
- Year 2: Fund XYZ returned 12%, while the benchmark returned 8%.
- Year 3: Fund XYZ returned 10%, while the benchmark returned 7%.
Based on these trailing returns, an investor might conclude that Fund XYZ is an excellent investment choice, consistently outperforming its benchmark.
To Wrap It Up…
To conclude, trailing returns mutual funds are useful for evaluating how a fund has performed from one specific date to another, offering insight into its long-term performance. However, to gauge a fund’s consistency and performance during varying market conditions, rolling returns of mutual funds surpass trailing returns.
FAQs
To find the rolling returns of mutual funds, you can use the following steps:
1. Choose a rolling period, such as 1 year, 3 years, or 5 years.
2. Calculate the point-to-point return for the rolling period, starting on a specific date and ending on 3. the same date one rolling period later.
4. Move the start and end dates forward one day at a time.
Yes, rolling returns of mutual funds are a better measure because, unlike trailing returns, they can be relied upon to give a real picture of a fund’s performance over time, rather than just focusing on a single point in time.
No. Trailing return of mutual funds measures the performance of a mutual fund over a specific period of time, such as 1 year, 3 years, or 5 years. Total return, on the other hand, measures the performance of a mutual fund over its entire lifetime.
Rolling performance provides a more comprehensive view of a fund’s performance over time, while trailing performance only provides a performance snapshot at a single point in time.
