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One of the first things that investors look at before investing in any financial instrument are the returns that the investment has previously generated. However, commonly used returns calculation like CAGR, XIRR, etc. can only show how the scheme has performed in the past and they do not guarantee future returns in any way. Moreover, returns of a mutual fund by itself do not give a clear idea of how a scheme has performed with respect to either the broader market or the benchmark. This is where mutual fund returns data like annual returns, trailing returns and rolling returns can help in deciding which mutual fund scheme to invest in.
Read on to know the key details and how to calculate annual, trailing and rolling returns of mutual funds to be better prepared when choosing a suitable scheme to invest in.
What are Annual Returns?
The annual returns can be defined as the returns that a mutual fund scheme has generated in a calendar year. Annual returns of a mutual fund are typically represented as a percentage. So, if a mutual fund which has given annual returns of 15% in 2018 means that a Rs. 100 investment made in the fund at the beginning of 2018 would have grown to Rs. 115 at the end of 2018.
One should keep in mind this is not the same as annualized returns which is in fact another named for CAGR returns of a mutual fund. Now that you know the definition of annual returns, let’s take a closer look at the simple formula to calculate annual returns of a mutual fund.
Annual Returns (%) = [{(NAV of Mutual Fund on 31st Dec) – (NAV of Mutual Fund on 1st Jan)} / (NAV of Mutual Fund on 31st Dec)] * 100
As you can see, using the NAV of a mutual fund, the annual returns can be calculated quite easily. But the annual returns of a mutual fund by itself do not give a clear idea of the scheme’s performance. It is important to compare it against either the benchmark or the average returns of the category over a time-period. For example, the table below highlights the annual return of a small cap fund versus the small cap category average over the last four years.
Year |
Annual Return of XYZ Small-Cap Fund |
Small Cap Fund Category Average |
2019 |
60% |
53% |
2020 |
15% |
17% |
2021 |
30% |
32% |
2022 |
74% |
70% |
By looking at the year-on-year return comparison above, you will be able to get details about the fund's performance over the years. In the above table, it is clearly seen that the XYZ small-cap fund has surpassed its benchmark in all four years. These data show that the fund has out-performed its peers during the chosen time period.
What are Trailing Returns in Mutual Funds?
Trailing returns can be defined as the average annual return of a mutual fund between two particular dates known as the starting date and the end date. Another name for trailing returns is point-to-point return. You can use this data to see the performance of the mutual fund over a specific period. Trailing returns can be used to evaluate returns on the basis of year-to-date as well. It is one of the simplest methods to analyze mutual funds, as the calculation is based on the price movements that have occurred.
This return is computed by the compounding formula -
Trailing Returns = (Current Value/Starting Value) ^ (1/Trailing Period) – 1
As the formula shows, tracking returns are based on the two price points - current NAV i.e. fund NAV on the end date and starting NAV i.e. fund NAV on the starting date.
Usually trailing returns of mutual funds are calculated for periods exceeding 1 year. The below table shows the trailing returns of a hypothetical Index Fund versus its chosen benchmark index:
Trailing Returns Period |
Returns of Index Fund |
Returns of Benchmark Index |
3 year trailing returns |
18.28% |
19.12% |
5 year trailing returns |
16.19% |
16.99% |
10 year trailing returns |
15.78% |
16.08% |
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From the above table you can see that the returns of the Index Fund are lower than the benchmark index of the scheme. This is an expected occurrence in passive investments as there is no focus on generating alpha in such cases. However, comparison of schemes in the same category on the basis of trailing returns can help you make a better comparison of the relative performance of different schemes in the category so that you have better chance of choosing a suitable investment.
What are Rolling Returns?
Rolling return, also known as rolling period returns, refers to the average annualized returns which are computed for a particular span (it can be a week, month, or even the last day of any of the span) on a daily basis. These returns are scrutinized to evaluate the pattern of the return for a holding period (the period for which you will hold an investment). You must be aware of the importance of the holding period for positive returns from mutual funds.
Through this return, you will get a better picture of the fund’s performance over multiple periods. In simple words, you will get to see the absolute performance of the fund over a regular span of time.
Through the rolling return, you can get an insight into the consistency and performance of funds. Rolling return acts as a base to evaluate many metrics, which include capture ratios, Sharpe ratios, standard deviations, etc. Refer to the table to understand the rolling return of the XYZ fund for various periods.
Investment Span |
Less than 0% return |
0 to 8% return |
8-14% return |
More than 14% return |
1 year |
21% |
15% |
9% |
55% |
3 year |
10% |
22% |
12% |
57% |
5 year |
1% |
14% |
20% |
60% |
7 years |
0% |
7% |
25% |
70% |
You can get an idea from the table regarding the chance of earning a particular return percentage. Those who have chosen the investment span of 7 years have earned returns from anything between 7% to 70%. On the other hand, those who have chosen to hold the investment for one year have earned a maximum of 55%.
What’s more, any individual who has stayed invested in the above scheme for 7 years has not lost money on his/her investment. This is typically why it is recommended that one stays invested in equity mutual funds for periods of over 5 years so as to mitigate the chances of short-term volatility.
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Difference Between Trailing and Rolling Returns
Refer to the table below to get a complete idea of the particularities of trailing return and rolling return:
Trailing Return |
Rolling Return |
Trailing return computes the mutual fund performance by considering the point-to-point returns. |
Rolling return, on the other hand, gauges returns at varied times. In this, you can use numerous spans of time, like three, four, or ten years at different intervals. |
You will get transparency regarding the absolute return. |
You will get insights into the average returns over a span. |
Trailing returns does not curb any bias. |
On the contrary, rolling returns curbs the bias related to returns. It functions on a probability basis. |
You will not get an idea of the performance of the fund over a long span. |
You will get an idea of how the mutual fund functioned over time at particular intervals depending on consistency and performance. |
You will not be able to fetch much detail about the market ups and downs with trailing returns. |
You will get a better picture of the market condition from this type of return. |
Frequently Asked Questions (FAQs)
Q. Does annual return take into account multiple cash flows during the investment period?
No. Annual returns only considers a situation similar to a lump sum investment made at the start of the period and a lump sum withdrawal at the end of the period. In the case of multiple cash flows, only XIRR or extended internal rate of return formula can be used.
Q. How to interpret trailing returns of a mutual fund?
Since trailing returns are calculated over various time periods, it can help investors compare recent performance of a scheme with respect to earlier performance. This can help investors gauge the potential ability of different types of mutual funds to perform consistently over different time periods. But one needs to keep in mind that past performance does not guarantee future performance of the scheme.
Q. How to interpret rolling returns of a mutual fund?
Rolling returns of a mutual fund can help investors estimate the potential returns that their chosen scheme can generate over a specific time period. This data can help investors identify how long they may need to stay invested in a scheme of their choice in order to reach their desired investment goal. Clear understanding of this can be vital in the process of process of retirement planning.
Q. Why should investors focus on long-term returns rather than recent short-term performance?
Mutual Funds especially equities are prone to significant volatility in the short term. So, recent returns data is not a good way to determine the potential returns that the scheme might offer. On the other hand, looking at longer term data of the fund means one looks at a scheme over multiple periods of ups and downs. So, returns data gathered over a longer time period can help determine overall performance of the scheme to a much greater extent.
Q. Are annual and annualized returns the same thing?
No. Annual returns refer to returns generated by a mutual fund for a specific calendar year based on the start date of January 1 and end date of December 31 of the applicable year.
Annualized returns are another name for CAGR returns i.e. Compounded Annual Growth Rate which have a different calculation formula and is not restricted to any specific annual period i.e. it represents the returns of the scheme calculated for a longer or shorter time period.
Sources:-
https://www.fisdom.com/rolling-returns/
https://www.etmoney.com/learn/mutual-funds/annual-vs-trailing-vs-rolling-returns-meaning-calculation-importance/
https://www.valueresearchonline.com/stories/50987/rolling-returns-vs-trailing-returns/
https://groww.in/blog/what-are-trailing-and-rolling-returns
ARN No : October23/Bg/17C
