When evaluating mutual funds, several important factors need to be considered. One such factor is trailing returns, a commonly used metric that assesses the performance of investment portfolios, mutual funds, and other financial instruments. You need to understand trailing returns, their calculation process, and other relevant details to make well-informed investment choices.
Also known as point-to-point returns, trailing returns represent the returns of a mutual fund scheme or any other investment over a specific period leading up to today. They show the recent performance and provide insights into how the fund has performed over that timeframe.
Unlike annual or calendar-year returns, trailing returns are calculated over specific periods such as one, three or five years and updated daily. This makes them an efficient tool for evaluating an investment’s current momentum and consistency across various periods.
The following are some key features of trailing returns in mutual funds:
Trailing returns show how an investment has performed over a chosen period up to the present, such as one, three, or five years. It is like looking back to gauge the investment's recent performance. By examining returns across multiple years, you can understand how well the investment has paid off over various market conditions or phases.
Trailing returns allow you to easily compare different investments over the same period. This makes it straightforward to see which investment has achieved better results within a specific timeframe, supporting decision-making.
By analysing trailing returns, you can assess an investment’s risk and volatility. A steady positive trailing return may suggest stability, whereas significant fluctuations might point to higher risk.
Investors and traders use trailing returns to make informed decisions on buying, selling or holding investments. This historical view helps in assessing future potential based on past trends.
Trailing returns are calculated with a formula that uses a mutual fund's net asset value (NAV). The NAV represents the per-share value of a mutual fund, calculated by taking the fund’s assets (cash and securities), subtracting its liabilities and dividing by the total number of shares.
To calculate trailing returns, use the following formula:
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Trailing Return = [(Current NAV - Starting NAV) / Starting NAV]* 100 |
For example:
Suppose you invested in an equity mutual fund on November 10, 2022, when its NAV was ₹85. On November 10, 2024, the NAV stood at ₹115. Using the formula, you will get:
2 year trailing return = [(₹115 – ₹85) ÷ 85] * 100 = 35.29%
This means the mutual fund's value increased by 35.29% over the past two years.
Here are some crucial advantages of trailing returns:
You can use trailing returns to measure your investment performance against a benchmark index. By comparing your returns to the benchmark, you can evaluate if your investments are performing according to the set target level.
Trailing returns helps you get a better understanding of how your investments are performing over time, considering the market fluctuations. By evaluating returns over a designated time frame, you can discern how your investments performed during times of market volatility and periods of calm.
Trailing returns helps you make informed decisions on asset allocation and risk management. By reviewing the performance over different timeframes, you can identify high-return assets and those with higher volatility. This assessment enables you to refine your investment approaches to meet your financial objectives while controlling risk effectively.
The following are some disadvantages of trailing returns:
Trailing returns only capture a snapshot of past performance for the chosen time frame, often falling short of reflecting the current market landscape. This narrow view may overlook recent trends and factors that could shape future outcomes. Always remember that past performance does not guarantee future results.
While trailing returns can reveal how an investment performed historically, they offer no guarantee of future performance. Market conditions, economic shifts and volatility can all impact what lies ahead. Consider looking beyond just historical returns by evaluating factors like the investment’s management team, fees and strategy to make informed choices.
It does not factor in expenses like management fees, transaction costs and taxes, which can significantly affect actual returns. These costs can reduce an investment's overall performance. So, it is wise to account for fees and taxes when reviewing and comparing investment options.
When evaluating stocks with high trailing returns, it is essential to keep a few key factors in mind:
You must look into the company's financial health to ensure it is stable and has a reliable track record.
High trailing returns may result from significant price swings, indicating that the stock could be risky.
Make sure the company shows signs of growth and has a positive outlook for the future.
A high trailing return might also mean the stock is priced high, which could impact its value for money.
Thus, trailing returns help you to compare investment performance, assess mutual funds and choose the one suitable for you. However remember, just because an investment performed well in the past does not mean it will continue to do so.