Annual, Trailing and Rolling Returns of Mutual Funds & Their Differences

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 31^st Dec) – (NAV of Mutual Fund on 1^st Jan)} / (NAV of Mutual Fund on 31^st 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.

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.

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:

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.

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.

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.

Refer to the table below to get a complete idea of the particularities of trailing return and rolling return: