Mutual fund investors often refer to terms like trailing returns and rolling returns when evaluating the performance of funds. These return metrics help assess how a fund has done over different periods of time. However, there is a key difference between trailing returns and rolling returns that investors need to be aware of to make informed investment choices.
What are trailing returns?
Trailing returns refer to the total returns generated by a mutual fund scheme over a predefined period in the past from the current date. For example, if you are calculating 3-year trailing returns today:
- You look at the NAV (net asset value per unit) of the fund 3 years ago on this same date.
- Then you compare it to the current nav today.
- The percentage increase (or decrease) between these two NAVs gives you the 3-year trailing returns for the fund.
Trailing returns essentially measure the compound annual growth rate (CAGR) delivered by the fund over the specified time period in one single number.
Some key points about trailing returns
- Easy to calculate and comprehend.
- Captures total returns delivered since a fixed point in past.
However, it does not show returns delivered during different time periods within that span.
Understanding rolling returns
Rolling returns are different from trailing returns in that they calculate returns over rolling windows of fixed duration like 1 year, 3 years or 5 years, on an ongoing monthly or annual basis. For example, calculating 3-year rolling returns every month would involve:
Comparing NAV after 36 months (3 years) from current month to the NAV in the current month. Then shifting the start month ahead by one month and repeating the process, i.e. comparing NAVs after 36 months from the next month and so on. This rolling window calculation is done continuously to provide monthly or annual returns over the duration being considered like 3 years in this case.
Some important points about rolling returns
- Provides a time series of returns across different periods within a duration like 3 years.
- Helps analyze fund performance during periods of market ups and downs over time.
- More insightful than trailing returns but calculations are more complex and numbers change every period.
When to use trailing vs rolling returns
Trailing returns are more suited when an investor simply wants to know the total returns delivered by a fund over a completed time period in the past. Rolling returns on the other hand provide a richer view of the fund’s behaviour through market cycles. For long-term performance evaluation spanning 5-10 years, trailing returns work better. For medium-term assessment of 2-5 years, rolling returns allow examining performance in different market conditions. Rolling returns are critical to analyze whether a fund consistently delivered returns through market ups and downs. Fund houses prefer advertising higher trailing returns while rolling returns give a real sense of risk-adjusted performance. Both metrics together provide a comprehensive view of the fund’s capability over time.
Conclusion
While trailing returns provide a simple total return view, rolling returns offer valuable insights into a mutual fund‘s performance consistency across diverse market conditions. Using both measures together balanced with scheme details helps evaluate quality of returns delivered over time for informed investment decisions. Regular computation and tracking of returns are essential for active fund monitoring.
