What are Rolling Returns and How Do They Differ from Trailing Returns?
Investors looking forward to investing in mutual funds check the fund’s past performance, especially returns. Rolling returns are one way to measure a fund’s previous performance and compare it against its benchmark and peers. Let’s dig deep to understand the meaning of rolling returns and its various other aspects.
What Are Rolling Returns?
Rolling returns are the annualised average returns offered by a mutual fund for a time period. Calculated on a chosen frequency such as daily, weekly or monthly, they offer a comprehensive overview of a fund's performance at different points in time. Rolling returns are more indicative of a fund's true performance. Because they factor in different periods, you can measure the return consistency of a fund.
How To Calculate Rolling Returns?
Let us understand the process of calculating rolling returns with an example. Suppose you want to see the 5-year return of a fund over 10 years from 2010 to 2020. A rolling return would mean calculating a 5-year return each day during this period. You need to compute the 5-year return as on 1st January 2010, 2nd January 2010 and continue till 31st December 2020.
This calculation will show you the spread of returns if you invested your money any day during the period (2010 to 2020) for 5 years. Online calculators are available to help you calculate rolling returns with ease.
What Are Trailing Returns?
Along with rolling returns, investors use trailing returns to calculate mutual fund returns. Simply put, trailing returns help measure returns between two dates. They are also known as point-to-point returns, reflecting performance between a starting and end date. Let’s understand trailing returns with an example.
Suppose you’ve invested in a mutual fund on 1st January 2023 and want to know the returns earned on 15th September 2024; find out the fund’s net asset value (NAV) on these dates. If the fund’s NAV on 1st January 2023 was ₹200 and it rose to ₹250 on 15th September 2024, the fund’s trailing returns would be as follows:
Trailing returns = { (NAV on end day - NAV at start day) / NAV at start day} X 100
So, trailing returns in the above case would be { (250 - 200) / 200)} X 100, which equals 25%.
Rolling Returns Vs Trailing Returns: The Differences
The table captures the differences between rolling returns and trailing returns on various aspects, which will help you understand how rolling returns differ from trailing returns:
| Aspect | Rolling returns | Trailing returns |
|---|---|---|
Time period | Involves multiple overlapping periods of equal length | Involves a single fixed period |
Calculation frequency | Calculated for each interval | Calculated only once |
Bias | Reduces bias and the impact of a specific start or end date | Can involve bias with the chosen start and end date |
Market conditions | Accounts for multiple market conditions | Reflect market conditions from start to end date |
Data requirement | Requires more data over different time frames | Requires less data as only start and end date are needed |
In Conclusion
As rolling returns involve several overlapping periods, they give a more comprehensive overview of a fund’s return. It offers a better perspective of a fund’s performance as it’s not involved by recency bias. As each day’s return is considered during the entire duration, it negates the impact of market volatility.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.
