Demystifying Performance: Trailing vs. Rolling Returns in Mutual Funds
Posted on 16-Jul-2024
Trailing vs Rolling Returns: Unveiling Mutual Fund Performance! Choose the right metric for you.
Table of Content
However, evaluating a mutual fund's past performance is crucial before investing. Two key metrics used for this purpose are trailing returns and rolling returns. Understanding the difference between them can empower you to make informed investment decisions in the Indian mutual fund market.
And this is what we aspire to achieve with the discussion that shall follow in this blog post. Let’s get started!
What Are Trailing Returns?
Trailing returns represent the annualized return on investment generates over a specific period in the past. It's a point-to-point calculation, considering the investment's starting and ending value within that timeframe.Imagine a snapshot of your mutual fund's performance over a specific time period, like 1 year, 3 years, 5 years, or even a specific date. Trailing returns are like looking at that snapshot. They tell you how much your investment has grown (or lost, hopefully not!) over that particular timeframe.
For instance, trailing returns can show you if your mutual fund has done well over the past 10 years, even if it hasn't performed as well in the last year or five years. However, trailing returns don't provide the whole picture of a fund's consistency throughout different market conditions.
Trailing returns can be calculated using the following formula:
Trailing Return = (Current NAV / Starting NAV) ^ (1 / Trailing Period) – 1
Now let’s consider an example
If you invest Rs. 10,000 in a mutual fund scheme on January 1, 2023, and its value grows to Rs. 12,100 by December 31, 2023, the one-year trailing return would be 21%.
Where—
Current NAV: Net Asset Value of the fund on the current date
Starting NAV: Net Asset Value of the fund that was at the start of the trailing period
Trailing Period: The timeframe over which the trailing return is being calculated
Simple enough? Now let’s roll on to rolling returns.
What Are Rolling Returns?
Think of rolling returns like looking at your mutual fund's performance through a constantly moving window. Instead of just one snapshot (like trailing returns), you get a series of snapshots, each showing the average annualized return over a chosen period (like 1 year, 3 years, etc.). This way, you can see how the fund's performance has changed over time. Rolling returns provide a more dynamic perspective than trailing returns.Imagine the same mutual fund scheme from the previous example. A rolling 1-year return would be calculated for each month-end in 2023. This would give you a better idea of how the fund performed throughout the year, not just at the end.
The formula for calculating rolling returns is as follows:
Rolling Return = (Ending NAV – Beginning NAV) / Beginning NAV * 100
Where—
Ending NAV: Net Asset Value of the fund at the end of the period
Beginning NAV: Net Asset Value of the fund at the beginning of the period
Let us now glance through the features, uses and limitations of each of these types of returns:
Trailing Returns: Features, Uses and Limitations
Here is a more detailed breakdown of trailing returns for a better understanding of the concept:Features:
• Simple and Easy to Understand: Trailing returns provide a straightforward snapshot of an investment's performance over a specific period ending at the present. This makes them easy to grasp for investors of all experience levels.
• Readily Available: Trailing returns are typically displayed prominently by mutual funds for common periods like 1 year, 3 years, or 5 years. You can easily find them on fund fact sheets or investment platforms.
• Focus on Recent Performance: Trailing returns highlight how an investment has performed lately. This can be helpful for gauging current momentum and making investment decisions based on recent trends.
Uses:
• Quick Comparison Tool: Trailing returns allow you to compare the performance of different mutual funds over the same period. This helps you identify funds that have been generating strong returns recently.
• Evaluating Short-Term Trends: Trailing returns are useful for spotting short-term trends in a fund's performance. This can be helpful for investors with shorter investment horizons.
• Understanding Past Performance: Trailing returns provide a glimpse into a fund's historical performance for a specific timeframe. This can be a starting point for further research on the fund's overall track record.
Limitations:
• Limited View: Trailing returns only show performance for a specific period and don't reflect the fund's consistency throughout different market conditions.
• Recency Bias: Trailing returns can be heavily influenced by recent market movements, potentially giving an inaccurate picture of the fund's long-term potential.
Let us see how the limitations of trailing returns may act as blinkers to understanding the performance of your fund:
Imagine two mutual funds: Fund A and Fund B.
• Scenario: Both Fund A and Fund B have a 10% trailing return over the past 5 years. This snapshot looks great for both!
• Limitation: Trailing returns don't show us the journey within those 5 years. Here's where the limitations come in:
- Possibility 1: Maybe Fund A had a steady, consistent 10% growth year-over-year for the past 5 years. This would be a very attractive and potentially lower-risk option.
- Possibility 2: Maybe Fund B had a fantastic first year with a 50% return, followed by 4 years of flat or even slightly negative returns, averaging out to 10% over 5 years. This could be a riskier option with a higher chance of volatility.
Trailing returns wouldn't tell us the difference between these two scenarios. They only show the end result, not the path taken to get there.
Rolling Returns: Features, Uses and Limitations
Let us now talk about rolling returns in mutual funds in more detail:Features:
• Comprehensive View: Rolling returns provide a more detailed picture of a fund's performance compared to trailing returns. They offer a series of performance snapshots for different holding periods, continuously moving forward. This allows you to see how the fund's returns have fluctuated over time.
• Focus on Holding Periods: Rolling returns are particularly useful for understanding a fund's performance for different investment horizons, represented by the holding period (length of time you hold the investment). This helps you assess how the fund might behave if you plan to invest for a specific timeframe.
• Risk Assessment: By analysing rolling returns across various holding periods, you can gain insights into the fund's consistency and potential volatility. Consistent rolling returns across different timeframes indicate a potentially less risky investment.
Uses:
• Evaluating Performance Consistency: Rolling returns help you assess a fund's ability to generate consistent returns across different market cycles. This is crucial for long-term investors who prioritize stability.
• Investment Strategy Alignment: By analysing rolling returns for your desired holding period, you can see how a fund has performed historically for similar timeframes. This can help you choose a fund that aligns with your investment goals and risk tolerance.
• Risk-adjusted Analysis: When combined with other metrics like standard deviation (a measure of volatility), rolling returns can help you understand the risk-reward profile of a mutual fund. Higher rolling returns with lower volatility generally indicate a more attractive investment.
Limitations:
• Data Overload: Analysing a vast amount of rolling return data for various holding periods can be overwhelming. It's crucial to choose relevant holding periods that align with your investment horizon.
• Past Performance: Rolling returns, like trailing returns, are based on historical data. Past performance doesn't guarantee future results, and market conditions can change significantly.
• Statistical Noise: Short-term fluctuations in the market can create temporary spikes or dips in rolling returns. Consider smoothing techniques or focusing on longer holding periods to reduce this noise.
So, does rolling returns give us a holistic picture of how our fund has fared? Let’s dig in!
Imagine a mutual fund, Fund X, that invests heavily in technology stocks.
• Scenario: The technology sector experiences a boom year, leading Fund X to deliver a phenomenal 30% return for a 1-year holding period according to its rolling returns. This would be very attractive to investors seeking high growth.
• Limitation: Rolling returns only show historical performance. Let's say the following year, the technology sector experiences a correction, and Fund X delivers a negative 10% return.
Here's how this could play out:
• Misleading Picture: A new investor looking solely at rolling returns might see the initial 30% return and be very excited, potentially overlooking the following year's negative performance. This could lead to an overly optimistic view of the fund's future potential.
• Statistical Noise: Short-term market fluctuations can significantly impact rolling returns, especially for shorter holding periods. The initial 30% return might be partially due to temporary market conditions rather than the fund's long-term investment strategy.
Which One is a Better Indicator of Performance?
From the discussion on the features, uses and limitations of each of these returns, we can arrive at one conclusion. There's no single "better" option. The suitability depends on your investment goals and risk tolerance:• For short-term investors: Trailing returns can be a good starting point to compare funds for a specific investment horizon (e.g., 1 year).
• For long-term investors: Rolling returns are more insightful. They reveal consistency and potential volatility, which are crucial factors for long-term wealth creation.
Difference Between Trailing and Rolling Return in Mutual Fund
Let us condense our understanding and the differences between trailing and rolling returns in this table below:Trailing Return | Feature | Rolling Return |
Point-to-point return | Calculation | Annualized return for a period at various points |
Fixed period (1 year, 3 years) | Periodicity | Calculated at regular intervals |
Past performance snapshot | Performance Insight | Consistency and potential volatility |
Comparing funds over a timeframe | Use Case | Assessing long-term suitability |
Conclusion
Both trailing and rolling returns offer valuable insights, but they serve different purposes. Utilize trailing returns for initial comparisons, and leverage rolling returns for a more comprehensive understanding of a mutual fund's historical performance within the Indian context.Remember, past performance isn't a guarantee of future results, so consider these metrics alongside your financial goals and risk tolerance before making any investment decisions.
And always remember to seek help and sound financial advice from a reputed asset management company like Shriram AMC, or an investment advisor to make an informed decision.
FAQs
Here are a few frequently asked questions about trailing and rolling returns:1. Can I use both trailing and rolling returns together?
Absolutely! They provide complementary information. Use trailing returns for initial screening and shortlist funds, then delve deeper with rolling returns to assess consistency and volatility.
2. Where can I find trailing and rolling return data for mutual funds in India?
Many investor portals and websites offer mutual fund performance data. You can check Shriram AMC to find this information on their websites and fact sheets.
3. Are there any limitations to the look-back period for rolling returns?
Yes, there can be practical limitations. While some platforms might offer rolling returns for extended periods, very short look-back periods (e.g., 1 month) might be less meaningful due to high volatility in short timeframes.
4. Do expense ratios affect trailing and rolling returns?
Trailing and rolling returns reflect the overall performance of the fund. Expense ratios, which are the fees charged by the AMC, are factored into the returns. Therefore, higher expense ratios will result in lower returns.
5. Should I chase high trailing or rolling returns?
Past performance is just one factor to consider. Don't chase the highest returns blindly. Focus on your investment goals, risk tolerance, and the fund's overall strategy before making investment decisions.
Was this article helpful?
Explore Shriram Mutual fund
Shriram Flexi Cap Fund
Invest nowShriram ELSS Tax Saver Fund
Invest nowShriram Aggressive Hybrid Fund
Invest nowShriram Balanced Advantage Fund
Invest nowShriram Overnight Fund
Invest nowShriram Multi Asset Allocation Fund
Invest nowLove our blog posts?
Subscribe to get updates directly to your e-mail inbox