When it comes to evaluating the performance of mutual funds, investors often seek a reliable and informative method to assess how an investment has performed over various time periods.
Rolling returns is a powerful tool that provides a dynamic view of a mutual fund’s performance over time.
In this article, we will explore rolling returns in mutual funds, how they work, how to calculate them, the benefits of using them, and how to incorporate rolling return information into your investment portfolio.
What Is Rolling Return?
Rolling return, also known as rolling period return, is a method used to evaluate an investment’s performance over different time frames within a given period. Instead of assessing the fund’s performance solely over a fixed period (e.g., 1 year or 3 years), rolling returns allow you to examine how the investment performed over multiple, overlapping time intervals. This offers a more comprehensive and flexible view of the fund’s historical performance.
How Does Mutual Funds Rolling Return Work?
Mutual funds rolling return is like looking at a series of snapshots to see how well a mutual fund has performed over various time periods. It’s a way to track its performance over short, medium, or long-term durations.
Imagine you’re taking pictures every day during a trip. Each picture is like a snapshot of the fund’s performance at a specific point in time. The rolling return looks at these snapshots in a sequence. For example, it might consider the fund’s performance over the past 1 year, then roll the snapshot forward a day and see its performance over the new 1-year period, and so on.
This rolling approach helps investors understand how the fund’s performance has varied over time, giving a clearer picture of its consistency and potential returns. It’s like seeing how the scenery changes in your trip photos, but instead, we’re looking at how the fund’s returns change over different time frames.
How To Calculate Rolling Returns in Mutual Funds
Calculating rolling returns involves a few simple steps:
- Select the Starting Date: Choose the initial date from which you want to calculate the rolling returns. This could be the beginning of a specific year, quarter, or any other suitable reference point.
- Set the Time Frame: Determine the time frame for which you want to calculate the returns (e.g., 1 year, 3 years, 5 years).
- Roll the Time Period: Start from the chosen initial date and calculate returns for the selected time frame. Then, move the start date forward by one day, week, or month (depending on your preference) and calculate returns again. Repeat this process until you’ve covered your desired time span.
- Record and Analyse: Record all the calculated returns for each rolling period and analyse the performance data to identify trends and patterns.
Let’s understand the concept of rolling returns with a hypothetical equity mutual fund.
Fund Selection: You’re interested in a popular Indian equity mutual fund known as “XYZ Equity Fund.”
Investment Date: Today’s date is October 13, 2023, and you plan to invest in XYZ Equity Fund for a 3-year period.
Objective: Calculate the 3-year rolling return for XYZ Equity Fund, considering the historical NAV data available.
Step 1: Choosing the Period
Since your investment horizon is 3 years, you’ll calculate the 3-year rolling returns.
Step 2: Collect Historical NAV Data
You access the historical NAV data for XYZ Equity Fund over the past several years. For this example, we’ll focus on the recent 3 years (from October 13, 2020, to October 13, 2023).
Starting Date: October 13, 2020
Ending Date: October 13, 2023 (Today)
Step 3: Calculate Rolling Returns
1. Year 1 (October 13, 2020 to October 13, 2021)
Starting NAV on October 13, 2020: ₹100
Ending NAV on October 13, 2021: ₹120
CAGR Formula is [(Ending NAV / Starting NAV)^(1/3)] – 1
= [(120 / 100)^(1/3)] – 1 ≈ 6.26%
2. Year 2 (October 13, 2021 to October 13, 2022)
Starting NAV on October 13, 2021: ₹130
Ending NAV on October 13, 2022: ₹150
[(150 / 130)^(1/3)] – 1 ≈ 4.88%
3. Year 3 (October 13, 2022 to October 13, 2023)
Starting NAV on October 13, 2022: ₹160
Ending NAV on October 13, 2023: ₹180
[(180 / 160)^(1/3)] – 1 ≈ 4.01%
Step 4: Analyse Rolling Returns
You’ve now calculated the 3-year rolling returns for each year within your investment horizon. The returns for each year were approximately 6.8%, 4.71%, and 6.24%, respectively.
Range of Returns: The 3-year rolling returns for XYZ Equity Fund during this period ranged from 4.01% to 6.26%. This demonstrates that returns can vary depending on the specific 3-year period.
Rolling Return Average: The average 3-year rolling return over this time frame is approximately 5.05%.
Furthermore, you can calculate the rolling returns of the fund on the basis of daily returns of the fund for a more detailed analysis. You continue shifting the start date forward by one day at a time and calculating the 3-year rolling return. Each day, you use the available NAV data to determine the returns.
For example, on October 14, 2020, you’d use ₹101 as the starting NAV, and so on. This process creates a time series of 3-year rolling returns. You can use spreadsheet tools to do this faster.
Incorporating rolling returns into your investment analysis can provide valuable insights. For instance:
- Identify Your Investment Period: If you’re considering investing in XYZ Mutual Fund for a specific period, such as 3 years, understanding the 3-year rolling returns can give you a more realistic view of potential returns.
- Analyse Historical Rolling Returns: By examining the historical rolling return range (max and min) and average for the 3-year period, you can assess the potential outcomes and make a more informed investment decision.
Benefits Of Measuring Rolling Returns Of Mutual Funds
- Long-Term Performance Assessment: Rolling returns allow for a long-term assessment, avoiding the influence of specific market conditions at a single point in time. Investors can analyse performance over multiple cycles, providing a more comprehensive view.
- Smoothing Out Market Volatility: By calculating returns over different periods, rolling returns help smooth out short-term market volatility, offering a more stable view of a fund’s performance. This aids in decision-making without being overly influenced by temporary market fluctuations.
- Risk Assessment: Rolling returns provide a clearer understanding of a fund’s risk profile by showing how returns vary over time. Investors can evaluate if the fund can consistently deliver returns or if it exhibits extreme fluctuations.
- Comparative Analysis: Comparing rolling returns of different mutual funds helps investors identify funds that have performed consistently well across various market conditions. This assists in making informed investment choices based on historical performance.
- Portfolio Diversification Insights: Investors can use rolling returns to assess how a fund fits into their diversified portfolio strategy. It helps in understanding how a specific fund contributes to the overall risk and return profile of the portfolio.
- Adjusting Investment Strategies: By analysing rolling returns, investors can adjust their investment strategies based on changing market conditions. For instance, they can identify trends and adjust their asset allocation to optimise returns.
How To Put Rolling Return Information In Your Investment Portfolio
To incorporate rolling return information into your investment portfolio, follow these steps:
- Choose Your Timeframes: Decide on the specific rolling return time frames you want to track, which could be based on your investment goals and risk tolerance.
- Select the Right Funds: Identify mutual funds that align with your investment objectives and are known for consistent performance.
- Regular Monitoring: Continuously monitor and update rolling returns data to keep your portfolio information up-to-date.
- Diversify Your Portfolio: Use the insights from rolling returns to build a diversified portfolio with funds that perform well across various time frames and market conditions.
By incorporating rolling returns into your portfolio management strategy, you can better navigate the complex world of mutual fund investing and potentially improve your long-term financial outcomes.
FAQs
What are rolling returns in mutual funds?
Rolling returns in mutual funds represent the annualised returns calculated for a specific investment period, typically moving from one day to several years. These returns are recalculated for each possible time frame within the given data to provide a comprehensive view of a fund’s historical performance.
How do rolling returns differ from regular returns?
Rolling returns offer a more dynamic perspective compared to regular returns, which are calculated for fixed periods, like 1 year or 3 years. Rolling returns cover various time frames, allowing investors to assess performance in different market conditions.
How do rolling returns differ from trailing returns?
Rolling returns and trailing returns are both used to measure a mutual fund’s historical performance, but they differ in their calculation method:
- Rolling Returns: Rolling returns consider various overlapping periods by systematically rolling the investment horizon. This provides a broader perspective on performance across different time frames, helping investors understand how consistent a fund’s returns are.
- Trailing Returns: Trailing returns calculate the return over a fixed, specified period, such as 1 year, 3 years, or 5 years. These returns are more straightforward but can be influenced by the specific start and end dates chosen.
What do positive rolling returns indicate?
Positive rolling returns suggest that the mutual fund has generally performed well over various time periods. This can signify a history of consistent performance, which may be an attractive feature for investors.
How should investors interpret negative rolling returns?
Negative rolling returns indicate that the mutual fund has had periods of underperformance. It’s essential to consider the severity and duration of these negative returns and whether they align with your risk tolerance and investment goals.
This article has been written for educational purposes only. The securities quoted are only examples and not recommendations.
