Rolling Returns of Mutual Funds

Rolling returns, also called rolling time periods, reflect the annualised average returns over a specific duration, ending on a particular date. These returns are calculated daily, weekly, or monthly, across the entire holding period until the final day of the chosen timeframe. They provide a consistent and comprehensive view of a scheme's performance over varying time frames. By assessing returns regularly, rolling returns help investors evaluate stability and consistency, offering deeper insights into the scheme’s return patterns. This makes them an essential tool for comparing performance, especially when analysing funds under fluctuating market conditions, aiding informed investment decisions.

Analysing the rolling returns of mutual fund schemes or portfolios sheds light on their historical performance during a specific timeframe. This detailed data provides investors with more accurate information, allowing them to assess performance across various time periods rather than relying on a single snapshot. Rolling returns serve as a tool to enhance the clarity of historical performance over multiple intervals.

What are Rolling returns?

Rolling returns, also referred to as "rolling period returns" or "rolling time periods," represent the average annualised returns for a specific duration, whether it is a week, month, or any defined period's endpoint. They are frequently employed to analyse how returns behave over different holding periods.

A holding period signifies the duration an investor retains an investment, spanning from its purchase to sale. This metric provides a clearer understanding of a fund's performance across multiple periods. The Trailing 12 months (TTM) stands out as a widely utilized measure for rolling returns.

This table explores key factors to consider when analysing rolling returns to gain valuable insights into your investments:

Factor	Description	Impact on Analysis
Investment goal & horizon	Long term: Choose longer rolling periods (3-5 years) to understand average performance. Short-Term: Use shorter periods (daily/weekly) to track short-term trends.	Focuses analysis on the timeframe relevant to your investment goals.
Dividends & fees	Reinvest dividends and subtract fees for a more accurate picture of net investment performance.	Ensures calculations reflect the actual return after accounting for income and expenses.
Mean return	Sum of all returns over a period divided by the number of time intervals.	Provides an average return to expect from your investment over time.
Standard deviation	Volatility of returns. A higher value indicates greater risk.	Helps assess the level of risk associated with the investment.
Risk-adjusted returns	Factors in standard deviation to compare investments with different risk levels.	Enables comparison of investment options based on both return potential and risk tolerance.
Time horizon	Longer Horizons: Offer a more stable and reliable picture of the investment's performance. Shorter Horizons: May be more volatilde and unpredictable.	Choosing the appropriate timeframe ensures the analysis reflects the investment's long-term potential.

Also read: Understanding returns from mutual funds

What is Rolling Return in Mutual Fund?

Rolling returns in mutual funds refer to the annualised average returns measured across a specific duration, calculated daily, weekly, or monthly, until the last day of the chosen period. Unlike point-to-point returns, which consider returns between two fixed dates, rolling returns provide a more comprehensive view of a fund's performance over various time frames.

This method evaluates the consistency and reliability of a mutual fund by analysing its performance across different market cycles. For instance, a 3-year rolling return calculates the annualised returns for every 3-year period within the selected timeline.

Rolling returns help investors understand how a fund performs during volatile markets, offering insights into its long-term potential. They are particularly useful for comparing funds, assessing risk-adjusted returns, and evaluating the steadiness of performance. By focusing on regular intervals, rolling returns ensure a well-rounded assessment of a mutual fund's ability to deliver consistent returns.

Importance of rolling returns for mutual fund analysis

Rolling returns are a valuable tool for mutual fund investors, unlocking crucial insights to guide decision-making. Here's how:

• Spotting consistent performers: Analysing rolling returns helps identify funds with a history of delivering positive returns across various timeframes. This consistency is a strong indicator of a fund's reliability and potential for future success.
• Comparative advantage: Rolling returns allow for a side-by-side comparison of different funds' performance over varying periods. This empowers investors to select the fund that best aligns with their investment goals and timeframe.
• Risk assessment made easy: By incorporating risk-adjusted returns calculated from rolling returns, investors can gauge the level of risk associated with each fund. This vital information helps them choose investments that align with their risk tolerance, ensuring a well-balanced portfolio.

How to calculate rolling returns in mutual fund?

Rolling returns provide a dynamic view of a mutual fund's performance by considering returns over various timeframes within a larger investment horizon. This helps investors understand how the fund has behaved under different market conditions.

Calculating rolling returns:

1. Define your investment horizon:
   The first step is to determine the total period you will be invested in the fund. This could be your retirement timeline, a child's education goal, or any other long-term objective.
2. Choose your review intervals:
   Next, decide on the frequency you want to see the performance calculated. Weekly, monthly, or quarterly intervals are common choices. These intervals act like snapshots within your overall investment horizon.

Example:

Let's say you plan to invest in a mutual fund for the next 10 years. You might choose to analyse rolling returns on a quarterly basis. This would generate 40 sets of rolling returns (10 years x 4 quarters/year). Each set would represent the fund's performance for the past 3 years (assuming quarterly intervals).

By analysing these rolling returns across different timeframes, you gain valuable insights into the fund's consistency, volatility, and overall risk profile. This information empowers you to make informed investment decisions that align with your risk tolerance and financial goals.

How to evaluate Rolling Returns?

• Select the time frame: Begin by choosing the rolling period (e.g., 1-year, 3-year, 5-year) to assess returns over consistent intervals. This period provides insights into the fund's performance across different market cycles.
• Calculate periodic returns: Measure returns at regular intervals within the chosen time frame (e.g., daily, weekly, or monthly) until the last day of the period. This smoothens out fluctuations and captures performance trends.
• Annualise the returns: Convert the periodic returns to annualised figures for a clear comparison across multiple periods and to observe consistency over time.
• Compare with benchmarks: Compare the fund’s rolling returns with relevant benchmarks to determine if it consistently outperforms the market, giving insights into its competitive strength.
• Assess volatility and consistency: Analyse how often returns dip below a certain threshold. Consistent, positive rolling returns indicate stability, while volatile returns may suggest higher risk.
• Use for fund comparisons: Rolling returns facilitate comparisons across funds, helping investors select those with steady performance across market conditions.

How to use rolling returns for Mutual Fund comparison?

Using rolling returns for mutual fund comparison offers a reliable way to evaluate fund performance over consistent intervals, reducing the impact of market timing. By measuring returns at daily, weekly, or monthly intervals within a specific time frame (e.g., 3-year or 5-year), rolling returns provide a continuous view of a fund’s performance across various periods, highlighting its ability to deliver stable results.

For comparison, choose the same rolling period for each fund to ensure consistency. Assess the funds' annualised rolling returns to see if they consistently outperform their benchmarks, which reflects their resilience in different market cycles. Comparing the frequency of returns below a set threshold can also reveal risk levels and stability.

This approach allows investors to identify funds with steady, high returns and minimal volatility, making it a valuable tool for selecting mutual funds suited to long-term goals. Reliable rolling returns suggest consistent performance despite market fluctuations.

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Advantages of measuring rolling returns of mutual funds

• Insight into long-term performance: Rolling returns offer a comprehensive view of an investment's performance across various market cycles, enabling investors to evaluate its long-term potential and sustainability.
• Risk assessment: By analysing rolling returns, investors can assess the volatility and risk associated with an investment over different time frames. This allows for a more informed decision-making process and better risk management strategies.
• Diversification evaluation: Rolling returns help investors evaluate the effectiveness of their diversification strategies by assessing the performance of individual assets or portfolios across diverse market conditions.
• Performance comparison: Rolling returns enable investors to compare the performance of different investments or investment strategies over time, facilitating better allocation of resources and portfolio optimisation.

Limitations Of Rolling Returns

• Complexity in calculation: Rolling returns involve calculating returns at frequent intervals, which can be complex and time-consuming for investors unfamiliar with advanced financial metrics.
• Dependence on historical data: Rolling returns rely entirely on past performance, which does not guarantee future results. Market dynamics and fund strategies can change, limiting predictive reliability.
• Does not capture sudden market shifts: Rolling returns smooth out short-term volatility, which may overlook sudden, significant market changes that impact fund performance.
• Lack of qualitative insights: These metrics focus purely on numerical performance, ignoring qualitative factors such as fund management style, economic conditions, or sector-specific influences.
• Benchmark dependency: Rolling returns comparisons depend on benchmark selection. Choosing an inappropriate benchmark can lead to misleading conclusions.
• Inability to reflect behavioural risk: Rolling returns do not account for investor behaviour, such as panic-selling during downturns, which can impact realised returns versus theoretical performance.

Example of Rolling Returns in Mutual Funds

Rolling returns illustrate a mutual fund’s performance consistency over varying time periods, making them an essential tool for evaluating investments. Let’s consider an example of a hypothetical equity mutual fund and its 3-year rolling returns.

Step-by-step example

1. Time frame selection: Assume the evaluation is for a 10-year period (2013–2023) with a 3-year rolling return calculated monthly.
2. Return calculation: Starting from January 2013, calculate the annualised returns for every 3-year period, rolling forward by one month (e.g., Jan 2013–Jan 2016, Feb 2013–Feb 2016, and so on).
3. Comparison with a benchmark: Compare these returns with a benchmark index, like Nifty 50, to assess fund performance relative to the market.

Key observations (hypothetical data)

Period	Fund Return (%)	Benchmark Return (%)	Outperformance (%)
Jan 2013–Jan 2016	12.5	10.8	1.7
Feb 2013–Feb 2016	13.2	11.0	2.2
...	...	...	...
Jan 2020–Jan 2023	15.0	14.5	0.5

Benefits derived from this example

• Performance stability: The table shows the fund consistently outperformed the benchmark across different 3-year periods, demonstrating stability.
• Risk-adjusted returns: Investors can assess whether the fund’s returns justify its risks by looking at volatility trends alongside rolling returns.

Points to consider

• Consistency over time: A fund with stable rolling returns across different market conditions indicates reliable performance.
• Benchmark comparisons: Outperforming the benchmark regularly signals strong fund management.
• Volatility analysis: Sharp dips in specific periods can highlight potential risks, guiding informed investment decisions.

By observing rolling returns, investors gain a detailed understanding of a mutual fund's long-term potential, ensuring better decision-making aligned with their financial goals.

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Applications of rolling returns

Understanding rolling returns

Rolling returns, also known as rolling period returns, are used to assess the performance of an investment over a series of overlapping periods. This method calculates returns for various time frames, such as 1-year, 3-year, or 5-year periods, rolled daily, monthly, or quarterly. This approach offers a comprehensive view of an investment’s consistency and reliability.

Measuring consistency

One of the primary applications of rolling returns is measuring consistency. By calculating returns over multiple overlapping periods, investors can observe how consistently a fund has performed. This helps identify whether a fund's performance is stable over time or if it fluctuates significantly. Consistent performance is often a desirable trait, especially for long-term investors seeking reliable returns.

Comparative analysis

Rolling returns are instrumental in comparative analysis. Investors can compare the rolling returns of different funds over the same periods to identify which fund has performed better consistently. This comparison can be particularly useful when choosing between multiple investment options, as it highlights which funds are more reliable and have sustained performance over time.

Risk assessment

Assessing risk is another crucial application of rolling returns. By analysing the variability in returns over different periods, investors can gauge the volatility and risk associated with a particular investment. Funds with lower variability in rolling returns are generally considered less risky, making them more attractive to risk-averse investors.

Performance attribution

Rolling returns also aid in performance attribution. By examining the returns over various periods, investors can identify specific time frames where a fund outperformed or underperformed. This can help in understanding the factors contributing to the fund's performance, such as market conditions, economic events, or managerial decisions. Performance attribution is essential for making informed investment decisions and improving future strategies.

Planning and forecasting

Lastly, rolling returns are valuable for planning and forecasting. Investors can use historical rolling return data to predict future performance and make informed investment decisions. By understanding past trends and patterns, investors can set realistic expectations and develop strategies that align with their financial goals. This forward-looking approach helps in building a resilient investment portfolio.

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How rolling returns add value to the investor?

Looking at just a single period's return (like 5-year returns) does not tell the whole story. Rolling returns offer a more valuable perspective for investors by considering several key factors:

• Market cycle representation: Traditional returns might be skewed by starting or ending during a specific market phase (bullish or bearish). Rolling returns present a broader picture, encompassing performance across various market cycles.
• Predictive power: While future performance is never guaranteed, past consistency offers valuable insights. Rolling returns reveal how a fund has performed through different economic conditions, potentially indicating its future behavior.
• Risk assessment: By analysing the dispersion (variation) of rolling returns, investors can gauge the fund's consistency. Lower dispersion suggests more stable returns, which might be preferable for long-term financial goals.
• Financial planning: Financial plans typically span decades, with periodic investments and withdrawals. Rolling returns provide a more unbiased view of a fund's historical performance across various timeframes, helping investors assess its suitability for their long-term needs.

How to put rolling return information in your investment portfolio?

Here are various methods to incorporate rolling return data into your investment portfolio decision-making process for mutual funds:

• Rolling returns offer a comprehensive view of fund performance across multiple market cycles, analysing returns over individual intervals.
• By selecting different intervals like three, five, or ten years, investors can gauge the highest and lowest average returns expected from the mutual fund over time.
• Comparing rolling returns of two mutual fund over an extended period provides valuable insights into their performance under different market conditions.
• Rolling returns offer a more accurate and unbiased method of assessing mutual fund performance over longer durations.

They showcase the consistency and reputation of mutual funds over extended periods, aiding investors in evaluating their long-term performance.

Rolling Returns of top fund categories

• Equity funds: Rolling returns for equity funds tend to show higher volatility but also offer potential for higher long-term returns. Consistency in rolling returns indicates strong fund management and ability to weather market fluctuations.
• Debt funds: These funds generally exhibit lower volatility, with rolling returns showing steadier performance. Debt funds may provide more predictable returns, making them suitable for risk-averse investors seeking stability.
• Hybrid funds: A blend of equity and debt, hybrid funds typically offer a balance between growth and stability. Rolling returns can fluctuate depending on the market conditions, but they generally provide moderate returns with lower risk than pure equity funds.
• Sector-specific funds: Rolling returns in sector-specific funds can be highly volatile due to their reliance on specific industries. Long-term rolling returns can help gauge the performance of sectors during different economic cycles.
• Index funds: These funds, which track a specific market index, often show rolling returns closely aligned with the performance of the index. They provide broad market exposure with low management costs, making them suitable for passive investors.

Difference between Trailing and Rolling Returns

Here are some differences between trailing and rolling returns:

Trailing Returns	Rolling Returns
Trailing returns assess the mutual fund's performance over specific periods like one, three, and five years, calculated from one date to another.	Rolling returns gauge returns at various time points, offering insights into the fund's performance across different periods.
It represents a type of point-to-point return that is annualised.	Multiple blocks of three, five, or ten-year periods can be utilised at different intervals for analysis.
Offers clear insight into absolute returns.	Offers insight into average returns across a timeframe.
Provides an indication of the fund's long-term performance.	Indicates how it performed over time at specific intervals, considering performance and consistency.

 

Key takeaways

• Rolling returns offer a comprehensive view of a mutual fund's performance over consistent time intervals, helping investors assess its stability and consistency.
• They are calculated periodically (daily, weekly, or monthly) within a chosen time frame, offering insights into how a fund performs across various market conditions.
• Comparing rolling returns with benchmarks enables investors to determine whether a fund is consistently outperforming the market, indicating strong fund management.
• While rolling returns smooth out short-term volatility, they may not fully capture sudden market shifts or qualitative factors influencing a fund's performance.
• Different fund categories (equity, debt, hybrid, sector-specific, and index funds) exhibit varied rolling returns, with equity funds showing higher volatility, and debt funds offering more predictable, steady performance.

Conclusion

In conclusion, rolling returns serve as a valuable analytical tool for investors seeking to gain deeper insights into the performance of their investments. By embracing the dynamic nature of rolling returns, investors can make informed decisions, mitigate risks, and optimise their investment portfolios for long-term success.

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