How To Measure Mutual Fund Performance: Trailing Vs. Rolling Returns 

Posted On: 11 May 2024

The past return on a mutual fund scheme is one of the key factors that investors analyse. So, it is important to understand what data to look at to assess mutual fund returns and how to interpret the numbers.

In this article, we will explore two common ways of measuring mutual fund returns – trailing and rolling returns. Understanding the difference between trailing and rolling returns in mutual funds can not only help you understand the performance of your mutual fund investments but also make informed decisions in the future.

Table of contents

Trailing vs. Rolling Returns: Understanding Mutual Fund Performance Metrics
Trailing returns
Calculation of Trailing returns
Uses and features of trailing returns
Rolling returns
Calculation of Rolling returns
Uses and features of rolling returns
Differences between trailing and rolling returns

Trailing vs. Rolling Returns: Understanding Mutual Fund Performance Metrics

The past return on a mutual fund scheme is one of the key factors that investors analyze. So, it is important to understand what data to look at to assess mutual fund returns and how to interpret the numbers.

Trailing Returns

Trailing returns measure the performance of a fund over a defined period, ending on a specific date. For example, you could measure the performance of a fund over the past five years, from February 10, 2018, to February 10, 2023.

Returns measured by trailing in mutual funds can give a quick glimpse of the point-to-point performance of a fund. This method can also be useful for comparing the returns of two funds over the same period.

However, they may not provide a complete picture as they do not show the fluctuations in the fund's performance along the way. For example, if a fund has given a 10% return in five years, there would have been times in that period where the returns could have fallen to 1% or risen to 30%.

So, though trailing returns are useful as an overview of the fund’s performance, they do not show how volatile the fund may have been.

Calculation of trailing returns

Trailing returns are calculated by comparing the investment's current value to its value at the beginning of the selected time frame. This metric is widely used in mutual fund analysis to evaluate historical performance and assess how the fund has fared over different time horizons.

To calculate trailing returns, the formula is

Trailing Return = [(Current Value - Initial Value) / Initial Value] × 100

For example, if a mutual fund had an initial value of Rs. 100 and its current value is Rs. 150 over a three-year period, the trailing return would be:

Trailing Return = [(150 - 100) / 100] × 100 = 50%

Trailing returns are best used in conjunction with other metrics like rolling returns to gain a comprehensive understanding of an investment's consistency and risk-adjusted performance over time.

Uses and features of trailing returns

Trailing returns are typically used to evaluate the profit or loss an investor would have made if they had invested in the fund during the specified period. For instance, trailing returns can be calculated for one year, three years, five years, or any other fixed duration. This metric is particularly useful for investors who are considering selling their mutual fund investments, as it provides a clear snapshot of gains or losses over the chosen time frame.

One of the key features of trailing returns is their simplicity. They provide precise data on the fund's performance without delving into averages or complex calculations. This makes them easy to understand and interpret, especially for investors focused on point-to-point gains or losses.

However, trailing returns do not offer a comprehensive view of a fund's overall performance or its consistency or volatility over time. They also cannot be used to predict future performance, as they lack insights into market fluctuations or trends.

Rolling Returns

Another way to measure mutual fund performance is through rolling returns.

Rolling returns analyze the performance of an investment over various overlapping periods. Instead of focusing on a fixed time frame, this metric calculates returns for consecutive periods.

For example, a rolling one-year return of a mutual may look at data over five years and calculate the return for each successive one-year period within that time frame. The timeline is rolled forward to show how a fund would have performed over each one-year period in the last five years. For instance, the data would be calculated from 2015 to 2016, then 2016 to 2017 and so on until the present date. To be more thorough, the data could even be rolled forward on a monthly basis (January 2015 to January 2016, February 2015 to February 2016 and so on). Weekly and daily rolling intervals could offer an even more granular perspective.

Rolling in mutual fund returns thus provide a comprehensive view of an investment's performance and volatility.

Calculation of Rolling returns

Calculating rolling returns is straightforward: Suppose you want to calculate the 3-year rolling return for a fund, and you have the following annual returns:

Year 1 (Jan 1, 2020, to Dec 31, 2020): +8%
Year 2 (Jan 1, 2021, to Dec 31, 2021): +5%
Year 3 (Jan 1, 2022, to Dec 31, 2022): +12%
Year 4 (Jan 1, 2023, to Dec 31, 2023): +10%

To calculate the 3-year rolling return, you start by calculating the return for each 3-year period.

First rolling period (2020-2022):

The returns for the years 2020, 2021, and 2022 are 8%, 5%, and 12%.

Add them up: 8% + 5% + 12% = 25%.

Then, divide by 3 (since it's a 3-year rolling return): 25% ÷ 3 = 8.33%.

So, the 3-year rolling return for the period from 2020 to 2022 is 8.33% annually.

Second rolling period (2021-2023):

The returns for the years 2021, 2022, and 2023 are 5%, 12%, and 10%.

Add them up: 5% + 12% + 10% = 27%.

Then, divide by 3: 27% ÷ 3 = 9%.

So, the 3-year rolling return for the period from 2021 to 2023 is 9% annually.

This method helps identify consistency in fund performance and smoothens out the impact of market volatility, making it an invaluable tool for long-term investment analysis.

Uses and features of rolling returns

Consistency evaluation: One of the primary uses of rolling returns is to assess consistency of fund performance. By calculating returns over overlapping periods (e.g., one-year, three-year, or five-year intervals), investors can observe how reliably a fund has performed over time, even during different market conditions. Rolling returns prevent skewed results caused by specific market events. This helps identify funds that deliver stable and predictable results, which are crucial for financial planning.

Comparative analysis: Rolling returns are effective for comparative analysis, enabling investors to compare the performance of multiple funds across identical time frames. This helps in selecting funds that align with specific investment goals and risk tolerance. Rolling returns can also be used for different durations, making them suitable for assessing both short-term and long-term investments.

Differences between Trailing and Rolling Returns

Here are some key differences between the two measurements:

Measurement basis: Trailing returns measure the performance between two points of time – a start date and an end date. Rolling returns take a larger period and roll the dates forward to show the average point-to-point returns at various intervals within that period.  
Simplicity: Trailing returns are simple to calculate and understand. They give investors a simple way to get an idea of their fund’s past performance at a glance. This metric is also useful for comparing the performance of two schemes during the same period. In comparison, calculating and understanding rolling returns requires more effort.
Limitations: Trailing returns do not show the fund's consistency or volatility in the assessment period. They are also susceptible to selection bias (the choice of starting and ending point can alter the results). On the other hand, rolling returns are more complex to calculate as it is data-intensive. Results are better represented on charts or infographics, which may be harder to interpret.

Conclusion

Knowing the difference between trailing and rolling returns in mutual funds can give you a more complete picture of the performance of your mutual fund investments. While trailing returns can give an overview of a fund's performance, rolling returns provide a more comprehensive view across market cycles. By looking at both trailing and rolling returns, you can make informed investment decisions and work towards potentially achieving your financial goals.

FAQs:

What are trailing returns used for in mutual funds?

Trailing returns are used to assess the past returns of a fund over a specific start and end date. They can be used to compare the performance of different mutual funds over the same timeframe.

What are rolling returns used for in mutual funds?

Rolling returns are calculated by taking the average return of a fund over a specific period, rolling forward on a regular basis. They offer insights into the fund's consistency.

Which is better for evaluating performance: trailing returns or rolling returns in mutual funds?

Both trailing and rolling returns have their advantages and disadvantages. A comprehensive fund analysis should also include other factors like risk-adjusted returns, volatility, expense ratios, the fund's investment objectives, etc.

What is an example of a rolling return?

An example of a rolling return is calculating three-year returns for a mutual fund over a ten-year period by evaluating overlapping intervals like years 1–3, 2–4, and so on. Consider a fund – it generated a 6% return in 1 year, which is the one-year rolling return. Over the past two years, it delivered returns of 2% and 13%.

Now, calculate the three-year rolling return: (6 + 2 + 13) / 3 = 7%. This means investors earned an average annual return of 7%, including compounding and reinvested income. It's an easy method to assess steady performance over time.

What are the benefits of rolling returns?

The benefits of rolling returns include providing a comprehensive view of an investment's performance across different market cycles and assessing its consistency over time. They also help smooth out the impact of market volatility, offering a clearer picture of long-term trends and reliability.

Are rolling returns better?

Rolling returns are often considered superior to trailing returns for long-term analysis because they account for performance consistency across multiple periods. This makes them more reliable for evaluating funds' stability and suitability for long-term investment goals.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.