When you’re looking at how a mutual fund is performing, there are three main ways to measure returns – annual returns, trailing returns, and rolling returns of mutual funds. Annual returns simply show the percentage of profit or loss over one year. Trailing returns help overcome the short-term bias of annual returns by looking at a longer period, which gives a bigger picture and helps us understand the power of compounding. However, trailing returns still have a drawback because they only show the performance of one fixed block of time, which doesn’t tell you much about how consistent or volatile a fund has been.
This is where rolling returns come in. The MF rolling returns are better at showing both the consistency and volatility of a fund’s performance over time. They give a more reliable and comprehensive view of how a fund has done across different periods, which makes them very useful for investors. While all three types of returns are important and should be considered before investing, in this blog, we’ll focus specifically on rolling returns and why they’re so valuable.
What are Rolling Returns?
The rolling return of mutual funds shows the average yearly returns of a mutual fund over multiple, specific time periods, calculated repeatedly. Unlike looking at fixed periods, rolling returns check performance over overlapping intervals. This gives a clearer picture of how the fund has performed over time.
Let’s make rolling returns easier. Imagine you want to invest in an equity fund for a five-year period, but want to check how the fund has done in every single five-year period possible in a time frame of 10 years. When rolled daily, you’ll be checking the fund’s performance for every possible 5-year period starting from each day within those 10 years. Suppose the 10-year time-frame is 1st January 2010 to 31st December 2019. The first period would be from 1st January 2010 to 31st December 2014.
The second would be from 2nd January 2010 to 1st January 2015, and so on. When you keep repeating this, you’ll get over thousands of 5-year rolling returns, showing how the fund performed over each 5-year stretch during that 10-year time-frame. When you take the average of all those thousands of rolling returns, you’ll find the average rolling return of the fund. This figure will give you a much clearer idea of the fund’s consistency, volatility, and overall performance, compared to just looking at a single 5-year period.
Importance of Rolling Returns in Mutual Funds
Before you invest, make sure to examine the mutual fund rolling return. It is essential to do so for the following reasons:
- Annual and trailing returns are not as good for measuring a mutual fund’s consistency of performance over a period of time. For example, the trailing returns of two funds can be the same, but they could have very different levels of performance during the same period. One fund could have experienced huge fluctuations, while the other showed steady, stable growth. Rolling returns are great at revealing those consistent performers.
- If you find that a fund’s periodic returns are all over the place, that could signal that investing in that scheme is risky. Rolling returns thus can help you avoid unnecessary risk.
- When you’re comparing the rolling returns of different funds, you can easily understand how each fund stacks up over various time frames, which gives you a clearer picture of their performance and helps you pick the one that aligns with your risk tolerance.
How to Calculate Rolling Returns
Calculating the rolling return of mutual funds is a complex process, one without a clear formula. This is a process that must be repeated over and over for each specific period within a larger time frame. Investors should look up rolling return calculators to get accurate results, but if you are curious, here are the steps that are followed in the calculation:
- Select the larger time frame over which you want to calculate the rolling returns.
- Decide the rolling period that you want to analyse. This can be anything – weekly, monthly, quarterly, one-year period, or five-year period. This period depends on how frequently you want to assess the returns.
- Gather the historical NAV data of the fund in question.
- Calculate the return for every single rolling period. The number of returns to calculate can reach hundreds or even thousands depending on the larger time frame and the frequency of rolling periods.
- After you have calculated the returns for each rolling period, find out their average to get the average rolling return for your specified time frame.
You can make a frequency table with all the rolling returns to get a better look at the distribution of returns. Calculating the rolling returns of a fund is clearly not as straightforward as calculating the annual or trailing returns. You can use online calculators to do the job for you.
How to Use Rolling Returns for Mutual Fund Comparison
When doing a mutual fund rolling returns comparison, it’s best to look at not only the rolling returns but also the return distribution. This rolling return distribution will show you how the returns are spread out across the different periods. For example, two funds can have similar average rolling returns, but their distribution of returns could vary significantly.
One fund might have more stable, consistent returns, while the other has periods of high returns mixed with huge drops. It can also help you assess how often a fund had negative returns or significantly lower than expected returns. A fund with more frequent low points would be considered more risky, even if its average rolling return is high. Lastly, the range of returns (both the highest and lowest values) can help you understand how the fund performs in both bullish and bearish markets.
Benefits of Using Rolling Returns
- Rolling returns give you a much more thorough analysis of a fund’s performance over the annual and trailing returns.
- Comparing the rolling returns of different funds can help you identify the more consistent performer.
- A mutual fund rolling return distribution table shows how returns vary across different time frames. This helps you see the range of returns as well as the best and worst periods within that time frame. Understanding this distribution can direct you to choosing funds that align with your risk tolerance.
- Looking at just annual returns can cause recent bias to take root in an investor’s mind, which ultimately leads to sub-optimal decisions. Rolling returns give a clearer picture.
- Rolling return distribution can allow you to analyse how a fund performs during different market conditions.
Example of Rolling Returns in Mutual Funds
Suppose Isha wants to invest for a 3-year period in a mutual fund. Before investing, however, Isha wants to know how the fund performed over all possible 3-year periods in the last 10 years. The time frame Isha will be looking at would be starting from 1st January 2014 to 31st December 2023. For daily calculations in this time frame, there can be hundreds or thousands of possible 3-year periods, such as:
- 1st Jan 2014 to 31st December 2016
- 2nd January 2014 to 1st January 2017
- 3rd January 2014 to 2nd January 2017
- And so on, until the final three-year time period – 1st Jan 2021 to 31st December 2023
Next, Isha will calculate the annual returns of each of these 3 year periods based on past NAV data. Once she has them, she can calculate the average of all these returns to get a single figure. She can also distribute them in a frequency chart. This chart will show how many times different ranges of returns occurred over the analysed periods. Here’s an example of what the chart can look like:
| Negative Returns | 0% to 6% | 6% to 12% | 12% to 18% | Above 18% | |
| Fund | 0% | 10% | 25% | 55% | 10% |
According to this chart, if Isha were to randomly invest in any three-year period possible in the last 10 years in this fund, there is a 55% chance she would have earned returns between 12% and 18%. This distribution tells us about the consistency of a fund. A wide spread indicates volatility, while a narrow band suggests consistency. It also allows Isha to gauge how well a fund can perform under different market conditions.
It’s good practice to use online calculators to understand the rolling returns of different funds. In this example, we took a three-year rolling period. This could easily have been used to assess one-year, five-year, or even ten-year periods.
Advantages of Rolling Returns of Mutual Funds
Analysing a fund’s rolling returns before investing can give significant advantages:
- Rolling returns show consistency, which can help you avoid making decisions driven by emotions and short-term market movements.
- They allow you to keep a long-term perspective. The power of compounding works better the longer you stay invested, which speeds up your wealth creation.
- The return distribution can help you spot various trends and provide you with a view of how a mutual fund performs over various time frames.
- The return distribution can also help you spot risky investments. If the distribution is all over the place, it means that the fund has evidently performed differently in different cycles.
- Rolling returns can help you compare the consistency of two funds, unlike trailing returns.
Conclusion
Analysing the rolling returns of mutual funds along with their return distribution can arm you with valuable information. It can help you identify consistent performers, which are healthier options, especially for long-term investors. One should note, however, that rolling returns are not the only factor to be considered when selecting a mutual fund. Factors such as assets under management of the mutual fund house, the fund manager’s track record, exit load, expense ratio, risk-adjusted returns, and the fund’s objectives also play a role in assessing a fund’s viability.
Your financial goals, risk tolerance, and investment horizon should guide your mutual fund investing journey. All these factors alongside rolling returns and return distribution can help you make better decisions when choosing a mutual fund. If you’re ever confused about any investments, it could prove worthwhile to have a chat with a qualified financial advisor first, who can create a personalised financial plan for your unique financial situation.
