Understanding Trailing and Rolling Returns

Most investors often focus on historical returns to measure a mutual fund performance before selecting a few for investment. However, not many know that there are other better ways to measure mutual fund returns and performance. Trailing and rolling returns are two such ways which can help an investor evaluate a fund’s performance. To make the most of your investment, you must first find out which of the two is an ideal method to measure returns. Read on to learn more about trailing and rolling returns.

What are trailing returns?

Trailing returns focus on historical returns of a stock or a mutual fund. Under trailing returns, the calculation is based on point-to-point returns before annualizing it. It gives an investor a broad idea about whether the mutual fund or the stock has generated wealth or reduced wealth over the chosen tenure. Here are some fund examples to evaluate the trailing returns:

Particulars	Fund A	Fund B	Fund C	Fund D
Start Date	July 1, 2016	July 1, 2016	July 1, 2016	July 1, 2016
Start NAV	Rs. 100	Rs. 100	Rs. 100	Rs. 100
Redemption	July 1, 2019	July 1, 2019	July 1, 2019	July 1, 2019
End NAV	Rs. 155	Rs. 158	Rs. 149	Rs. 131
3-year Returns	55%	58%	49%	31%
CAGR Returns	15.73%	16.47%	14.22%	9.42%

Looking at the above table, one may conclude that Fund B is an outperformer and Fund D is an underperformer as per annualized returns. However, the problem with this calculation is that it is a point-to-point return. To understand this simply, Fund B could have benefited from the investment timing and sale timing. It is possible that an investor bought the fund on August 1, 2016 and sold it on July 1, 2019. In this scenario, Fund B may not have been the outperformer. 

Therefore, the learning is that the trailing returns are heavily dependent on the date of entry and exit. If an investor invests in a fund by looking at trailing returns, he could very well end up with a fund that may have performed well on a point-to-point basis, but not consistently. 

What are rolling returns?

Rolling returns help in evaluating the performance of one or more funds over the chosen period. These are alternatively referred to as rolling period returns or rolling time periods. These focus on the holding period instead of the time of entry & exit in case of trailing returns.

Under this method, the fund performance is measured on an absolute and relative basis at regular intervals. Thus, rolling returns categorises the returns at various time intervals. As an example, returns are considered for every 3 months between 2015 to 2020, or 6 month returns from 2010 to 2020. The method considers many such intervals of 3/5/10 years to examine the fund performance over a period of time.

Benefits of rolling returns

Some of the noteworthy benefits of this method are:

• Effectively evaluates mutual fund performance
• Accurate method that is not biased towards any period
• Gives appropriate insight on returns to an investor
• Ideal for a recurring (monthly or quarterly) or a SIP investor
• Investors can use this to compute mean return of a mutual fund

Difference between trailing and rolling returns

For a better understanding of rolling returns and trailing returns, it is important to know how the two differ from each other:

Trailing returns evaluate mutual fund performance by focusing on a specific past date or period for the basis of calculation. It takes into account the entry and exit timing of an investment while calculating the returns. It can be the right method for investors to calculate the most recent performance of a mutual fund. However, it doesn’t take into account any fluctuations in the fund value. In such scenarios, this method may give inaccurate results.

With the rolling return method, however, an investor can consider this fluctuation. This method gauges returns between two periods like, 1st Jan to 1st Feb, 2nd Jan to 2nd Feb, 3rd Jan to 3rd Feb, etc, and an average of these returns is considered to fetch more accurate results.

In case the results of rolling returns and trailing returns method turn out similar or closer to each other in the long run, it can reflect that the fund may have had consistent performance and the entry and exit timing won’t make a difference.

Which method is best for SIP returns calculation?

Most of the investors prefer investing via Systematic Investment Plans (SIP) in mutual funds. In such cases, rolling returns are more useful and reliable. While evaluating a fund performance and calculating returns for the long-term, rolling returns cover most fluctuations in the market as compared to trailing returns.

Conclusion

In summary, investors looking to calculate the trailing returns must evaluate how the fund has performed in the long run from one date to another. To determine the consistency of the fund and how it has performed in bad or good times, rolling returns outperform trailing returns. Rolling returns help in assessing and estimating the overall performance of a fund over a time period at specific intervals to provide more accurate data to investors.

FAQs

1. Are trailing returns annualised?
   While evaluating a fund’s annualised returns over a specific time period, trailing returns look backwards from a particular date and end on the last day of the most recent day, month, quarter, or year.

2. What does a 5 year return mean in a mutual fund?
   5 year annualized returns mean that funds invested 5 years ago in a mutual fund have grown X% per year. It offers a summarized interpretation of annualized fund performance. It uses the principle of compounding to estimate how much of an investor’s funds have grown over the investment period.

3. Is CAGR same as the annualized return?
   An annualised return is a standardised extrapolated return that is computed as a percentage per annum. CAGR or compounded annual growth rate shows the average yearly growth of an investment.

4. How to invest in mutual funds?
   To invest easily in mutual funds, you can download the Fisdom app on your smartphone and explore a wide range of mutual fund products based on your risk/return expectations.

5. What is the Sharpe ratio in mutual fund?
   Sharpe ratio is a calculation used to evaluate the risk-adjusted returns of a mutual fund. This ratio gives investors an insight into the scope of generating extra return while holding a risky asset.