What are rolling returns?

Evaluating performance is crucial to making informed decisions in the world of mutual fund investments. One important metric that helps investors measure consistent performance is rolling returns. Unlike static returns calculated over fixed periods, rolling returns offer a more dynamic view of how a mutual fund performs across various time frames. This type of return helps investors understand the consistency of returns, which can play a key role when you choose to invest in mutual funds online.

In India, rolling returns are especially useful for individuals looking to invest in mutual funds online. They offer a more comprehensive view of a fund's performance, reducing the impact of market fluctuations during a single period. By reviewing the rolling returns of mutual funds, investors can better assess the consistency and resilience of their investments, which can be essential when using tools like the mutual fund SIP calculator.

In this blog, we will explore what rolling returns are and how they play a crucial role in evaluating mutual fund performance over time.

What is the meaning of rolling returns?

The core meaning of rolling returns revolves around calculating a mutual fund's average returns over multiple overlapping periods rather than one fixed period. Unlike one-time calculations like annualised or trailing returns, rolling returns assess performance across a range of start and end points. These rolling intervals, which can range from months to years, provide a better understanding of the fund's stability over time.

For instance, if a five-year rolling return for a fund is calculated yearly, it will be measured for 2017-2021, then 2018-2022, and so on. The rolling returns of mutual funds are generally expressed in annualised terms to offer an averaged perspective, smoothing out short-term volatility.

How are rolling returns calculated?

The calculation of rolling returns involves determining the average annualised return for each overlapping period of a set duration, like three, five, or ten years. The formula is as follows:

1. Choose a time period (e.g., five years) and start date.
2. Calculate the return from the start date to the end date of that period.
3. Move the start date forward by one day, month, or year (depending on the interval).
4. Repeat the calculation over each new interval to obtain the rolling return.

By calculating rolling returns in this manner, investors can assess how consistent a mutual fund's returns have been over time. For example, if a fund has an average five-year rolling return of 12% over 20 years, it suggests that, on average, investors may have expected similar returns when they invested in this fund during any five-year period.

Why are rolling returns important for mutual fund analysis?

The importance of rolling returns lies in their ability to reflect performance stability across various market cycles, which is valuable for mutual fund investors. This method enables investors to analyse a fund's performance regardless of market conditions, avoiding the limitations of single-period returns that may be influenced by temporary market fluctuations.

Rolling returns of mutual funds can reveal consistency and reliability, which is particularly useful for long-term investors. By examining different periods, investors can avoid the pitfalls of fixed-time calculations, such as annual returns, which may only provide a narrow view of fund performance.

How do rolling returns compare to other types of returns?

Rolling returns differ significantly from other return metrics like point-to-point returns and trailing returns:

• Point-to-point returns: These returns are calculated between two specific dates, such as the beginning and end of the year, but they might not account for interim performance. This approach can miss out on fluctuations or trends that occur between those points.
• Trailing returns: Trailing returns consider performance from the latest date backwards over a set period, such as one, three, or five years. While useful, trailing returns might not account for historical highs and lows effectively.

In contrast, rolling returns offer a comprehensive look, as they include multiple overlapping periods, allowing investors to gain a clearer picture of consistent fund performance. Using tools like a mutual fund SIP calculator can further help investors align rolling return data with their investment goals.

How can investors use rolling returns to make informed decisions?

Investors often use rolling returns as a benchmark for evaluating fund consistency. By focusing on the rolling returns of mutual funds, investors can determine if a fund has consistently met or exceeded return expectations across various intervals. This can be particularly helpful when choosing funds for long-term goals, as it highlights those that may withstand market volatility effectively.

For example, if two funds have an average annual return of 10%, but one has lower variation in rolling returns over several periods, investors might prefer this more stable option. Consistency is often crucial for long-term investments, as it suggests reliable performance irrespective of fluctuating market conditions.

How can rolling returns assist in making better investment choices?

The rolling returns metric provides a detailed view of a mutual fund's performance over time, offering an approach that minimises the limitations of fixed-period returns. By examining the rolling returns of mutual funds, investors gain insight into how a fund performs across different time periods, making it an essential factor in long-term investment decisions. 

When combined with a mutual fund SIP calculator, rolling returns provide investors with a clear view of performance trends, aligning well with long-term financial goals. This approach offers valuable insights into the complexities of mutual fund investment.