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What Are Trailing And Rolling Returns?

29 June 2022

Mutual funds are an excellent way to invest your money. They're professionally managed, which means they manage a wide variety of investments, including bonds and stocks.

Mutual funds can be a great choice for people who want to invest their money in a large pool of different types of stocks. A mutual fund lets you invest in many different shares at once and take advantage of economies of scale as well as diversification.

Evaluating mutual fund performance in India is challenging because no standardized metrics or statistical tools can be used to compare different funds. This makes it difficult to determine whether a particular fund is performing well or not, and it can also make it difficult to evaluate funds' overall performance as a whole.

There are mainly two ways to evaluate a mutual fund’s performance:

  • Trailing returns
  • Rolling returns

What Are Trailing Returns?

Trailing returns are a way to calculate the value of investments over a period of time. Instead of calculating the return on investment at the point when it is sold, trailing returns take into account how much it has risen or fallen since then.

In simple words, trailing returns meaning is about calculating point-to-point returns and then annualizing them and hence are also called point-to-point returns. This measure provides a more transparent picture compared to absolute returns as a mutual fund might have performed exceptionally well over a 5-year period, but may have sedated growth in the last 2-3 years.

It is important to note that trailing returns do not take into account any commissions or fees associated with trading.

Trailing Returns Uses and Features

The features and uses of trailing returns in India are as follows:

  • Trailing returns are the returns that measure the performance of a mutual fund for the past specific periods, such as 1 yr, 3 yr, 5 yr, or inception-to-date basis 
  • You can avail the data at any given time
  • Uses historical data to measure

What Are Rolling Returns?

Rolling Returns are calculated using the average of all previous returns and are used to determine the interest rate on a fixed-income security.

Rolling returns are an effective way to calculate your average annualized return, which is important when you're trying to determine how much interest you can expect from a specific investment.

It measures returns on mutual funds at different points of time, thereby eliminating any bias associated with returns observed at a particular point in time. With rolling returns, one can look at various cycles to know the highest return, the lowest return, and the average return of a mutual fund for a specified period.

These estimates allow investors to manage their expectations from the mutual fund. While rolling returns work on a probability basis, there is no bias towards any time period.

Rolling Returns Uses and Features

  • It measures returns on mutual funds at different points of time, thereby eliminating any bias associated with returns observed at a particular point in time
  • More Accurate
  • This methodology is not biased towards any particular period of time
  • It is a reliable way of showing returns for investing.
  • It gives proper insights to an investor
  • Good for a recurring (i.e. Monthly or Quarterly) or a SIP investor
  • It can be used for computing the mean return of the Mutual Fund

Conclusion

Trailing returns will give an indication of how the fund performed in long run from a particular date to another date but it’s difficult to understand from such data, how consistent the fund is in bad and good times which affects the return per cent to an investor. 

Rolling returns, on the other hand, will give the overall return of the fund over a time period at specific intervals which will help the investor to choose the best fund in terms of performance and consistency. 

Though on comparing, trailing returns vs rolling returns, we mostly see the data in terms of trailing returns by fund houses and sites, rolling returns have also started gaining popularity among investors of Mutual Funds.

Disclaimer: The views expressed in this post are that of the author and not those of Groww.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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