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What Is Rolling Returns in Mutual Funds?

  • Apr 17, 2024

One key parameter used to assess the returns generated by a mutual fund over time is 'rolling returns'. But what exactly are rolling returns, and why are they important for mutual fund investors? Let's understand this in detail.

What is Rolling Return in Mutual Fund?

So, what is trailing return in mutual fund? Rolling or trailing returns refer to the annualised average returns generated by a mutual fund over a specified period. Unlike point-to-point returns, which measure returns between two specific dates, a mutual fund rolling return captures the fund's performance over a series of time periods.

For instance, 1-year MF rolling returns will show the annual returns generated over the preceding 1-year period, which keeps moving with each passing year. Likewise, 3-year MF rolling returns will showcase the annualised returns over a 3-year period, and so on.

The mutual fund scheme's NAV (Net Asset Value) is considered over different periods to calculate rolling returns. The NAV considers the market value of the investments made from the pool of money collected from investors.

Why Calculate Rolling Returns?

Here are some key reasons why MF rolling returns are preferred by investors for mutual fund analysis:

1. It evens out volatility - Mutual funds can be volatile investments with significant fluctuations seen during different market cycles and events. Calculating rolling returns smooths out this volatility seen in different time periods.

2. Tracks performance consistency - MF rolling returns help gauge if a fund has been able to generate consistent returns over different periods of time. A fund with steady rolling returns inspires more confidence.

3. Reduces the impact of isolated events - Point-to-point returns can get skewed by isolated events that may have caused significant ups or downs. Rolling returns diminish the effect of such isolated events.

4. Provides bigger picture - While past performance is no guarantee of future returns, rolling returns give investors a good idea of the fund’s potential over the long term.

5. Allows comparison - Rolling returns allow an apple-to-apple comparison of different funds over identical time periods. An investor can easily compare mutual funds based on 1-year, 3-year or 5-year rolling returns.

Also Read about Can Mutual Funds Be Traded like Stocks?

How to Evaluate Rolling Returns?

When analysing and comparing mutual funds based on MF rolling returns, investors should keep these parameters in mind:

1. Time periods - Focus on longer time periods like 3-year and 5-year rolling returns rather than just 1-year returns to get a better perspective.

2. Category average - Compare the fund’s rolling returns with the average returns generated by other funds in the same category to gauge if performance is above or below average.

3. Risk parameters - Don’t just consider returns in isolation. Also, evaluate the fund’s rolling returns in light of risk parameters like standard deviation, Sharpe, and Sortino ratios.

4. Portfolio fit - See how well the mutual fund rolling return fits your investment goals, time horizon, and risk appetite.

5. Consistency - Give more weightage to funds that have delivered consistent MF rolling returns over different market cycles.

Also Read about Can Mutual Funds Be Traded like Stocks?

Avoid Recency Bias

When looking at rolling returns, investors should be wary of recency bias, i.e., giving more importance to recent returns while ignoring long-term performance. For instance, a fund may have given high returns in the past 1 year due to a temporary market rally, but its long-term 5-year rolling returns could be more moderate. So don't get swayed by short-term outperformance.

Rolling Returns of Top Fund Categories

Here's a quick look at the average rolling returns of some top mutual fund categories in India:

1. Large Cap Funds - 1-year: 22%; 3-year: 15%; 5-year: 12%

2. Mid Cap Funds - 1-year: 25%; 3-year: 20%; 5-year: 15%

3. Small Cap Funds - 1-year: 30%; 3-year: 25%; 5-year: 18%

4. Multi Cap Funds - 1-year: 24%; 3-year: 18%; 5-year: 14%

5. ELSS Funds - 1-year: 25%; 3-year: 19%; 5-year: 14%

5. Debt Funds - 1-year: 8%; 3-year: 9%; 5-year: 8%

So, when evaluating a mutual fund, look beyond just recent returns. Analyse rolling returns over 5-year and 10-year periods to get a realistic picture of return potential. This will help make an informed investment decision. Rolling returns of mutual funds provide a robust framework for the fund performance measurement.

Conclusion

Rolling returns of mutual funds are reliable metrics that provide valuable insights into a mutual fund's ability to generate consistent risk-adjusted returns across market cycles. Investors can make more prudent fund choices by looking at longer time horizons and understanding category averages. Periodic evaluation of rolling returns should be integral to one's mutual fund investment analysis.

Team Sharekhan
by Team Sharekhan

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