As an investor, most of us give high priority to historical returns when it comes to mutual funds investing.
But did you know that there is more than one way in which you can measure returns?
In terms of returns on investment, there are 2 ways to evaluate the performance of a mutual fund in the current market.
The first one is Trailing returns and the second one is Rolling returns. Let us understand the two in detail with examples of return percent of a few mutual funds:
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.
In simple words, trailing returns is the 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.
Say a mutual fund started with a value of Rs 100 on January 1, 2019, ended with NAV of Rs 200 on January 1, 2024.
Then year-on-year return will be 18.92%, by using the compounding formula:
(End Value/Start Value)^(1/Years)-1] till January 1, 2024.
This means that from January 1, 2019, to January 1, 2024, your investment has grown to Rs. 118.9, result of [100+(100*18.92 %)].
Next year i.e on January 1, 2020, return might be Rs 118.9 + 18.92 % of 118.9 = Rs.141.4 and so on.
Here is the example of a few funds with absolute and trailing returns over 3 years period.
|Particulars||Axis Bluechip Fund Direct Plan-Growth||Mirae Asset Emerging Bluechip Fund Direct-Growth||Franklin India Ultra Short Bond Fund||ICICI Prudential Regular Savings Fund Direct-Growth|
|NAV||Rs 100||Rs 100||Rs 100||Rs 100|
|NAV||Rs 151||Rs 145||Rs 133||Rs 129|
Here is the example of 5 mutual fund schemes with their trailing returns over 1Y, 3Y and 5Y period.
|Mutual Fund Scheme||Trailing Returns|
|1 year||3 years||5 Years|
|Axis Long Term Equity Fund-Growth- 1.33%10.65%14.41%||-1.33%||10.65%||14.41%|
|SBI Small Cap Fund Direct-Growth||-10.80%||11.94%||19.51%|
|Mirae Asset Large Cap Fund Direct-Growth||1.37%||11.82%||13.82%|
|Reliance Liquid Fund Direct-Growth||7.60%||7.20%||7.72%|
|LIC MF Index Sensex Fund Direct-Growth||0.38%||10.09%||7.96%|
In Rolling returns average out a series of returns over overlapping periods. It measures returns on mutual funds at different points of time, thereby eliminating any bias associated with returns observed at a particular point of time.
For instance, take a five-year rolling series starting January 1, 2020, for 15 years. Hence, returns would be calculated from January 1, 2020, to December 31, 2025; January 1, 2025, to December 31, 2030, and so on.
Through rolling returns, you can use several blocks of 3, 5 or 10-year periods at various intervals and see how a mutual fund performed over that period.
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.
If you bought a mutual fund scheme, one year ago for Rs. 1000 and sold it today at Rs. 1200, your point-to-point return or trailing return is 20%.
However, this method is vulnerable to major swings in value on the observation days.
In the above example, assume that the fund value drops to Rs. 1070 tomorrow – your point-to-point return is no longer accurate for a 1 year period.
However rolling return will consider this fluctuation. It will consider returns between say, 1st Jan to 1st Feb, 2nd Jan to 2nd Feb, 3rd Jan to 3rd Feb and take the average of these returns, thereby giving a more accurate result.
Features of Rolling returns
- It is an effective measure to gauge the performance of mutual funds
- 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 for 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
The Bottom Line
So to sum it up, trailing return 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 percent 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 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