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Concept of Rolling Returns
We introduced the concept of rolling returns in the previous chapter. In this chapter, we will discuss it in more detail.
But first, let us understand the concept of trailing returns.
Trailing returns are calculated on a point-to-point basis.
For example, if you invest ₹ 10,000 on 1st April 2020 and on 31st March 2021, your investment is worth ₹ 14,000, we will calculate trailing returns as:
[(14,000-10,000)/10,000] x100 = 40%
But what about the value of your fund on all the days in between? What if in August, the market had moved in your favour and your investment was worth ₹ 16,000?
This is where rolling returns come into the picture.
What is Rolling Returns?
Rolling returns are the annualized average returns for a specified period (day/week/month), taken till the last day of that period. It measures a fund’s absolute performance and relative performance across all timescales. It is also known as ‘rolling period returns’ or 'rolling time periods.’ Rolling returns are more dynamic and sensitive.
Rolling returns indicate the frequency and magnitude of a scheme’s stronger and poorer performance periods. Looking at rolling returns will help you obtain a historical perspective of the fund’s returns, rather than concentrating on the returns of more recent periods such as last month or last quarter.
Usually, for the calculation of rolling returns, several time periods are taken into consideration such as 3-years, 5-years, 10-years, etc. This shows the fund’s actual performance during these periods and reflects the consistency of the fund.
For calculating rolling returns, two things have to be taken into account:
1. The overall time period for which the return has to be calculated.
2. The intervals on which the return will be calculated.
These two are linked to each other and help us decide the time for which rolling return needs to be calculated.
Advantages of Rolling Returns:
Rolling returns are useful because:
- They provide an accurate understanding of the fund’s performance.
- Can be used to compute the mean returns of mutual fund schemes.
- Removes bias related to time period.
- Ideal to be looked at if you want to opt for the systematic investment plan (SIP) route.
Rolling Return vs Trailing Return
Below are the trailing and rolling returns of Mirae Asset Large Cap Fund – Direct-Growth from 3rd October 2016 till 30th September 2021. You can see that the rolling returns curve is much smoother.
Trailing returns provide an understanding of how a fund has performed from one date to another. Rolling return, on the other hand, reflects the fund’s performance in good times and bad. It helps us assess the overall performance of the fund and provides a more accurate understanding. In addition, rolling returns absorb the ups and downs of the market more effectively than trailing returns.
If a fund’s rolling returns and trailing return graphs look somewhat similar for a certain time period, it can be understood that the fund has maintained consistency over time.
Since in SIPs, investment is made regularly over some time, looking at rolling returns will be more beneficial than looking at trailing returns.
